Some Things Are More Difficult

(click on images to enlarge)

Note: I did not create either graph. The first is by USDA and the second is by Mark Stephenson (presented at a FMMO hearing July 9, 2007 Pittsburgh, Pa)

I will have to admit, I do not get why some people think the prices reported by NASS plants are somehow different from the CME. Yes each NASS plant "negotiates" with customers, but it is alway, always, CME plus a little insignificant sliver.

So, to me, it is difficult to imagine any improvement might be obtained with more frequent reporting (even if not delivered by pony express).

What I do get is the "make allowance" which is taken from the NASS price to arrive at "farm value." NASS and the make allowance were brought about to hide the fact that the same crooks were setting farm milk price.

The make allowance is fixed by regulation. Built into the make allowance is a return on investment (ROI). Above shows the breakdown for NFDM at 9% ROI. Cheddar is 8%. All in all a pretty good return in this day and age.

On the internet, I see "money market account" returns of .74% - few even have the money to put in a MMA. If a child set up a lemonade stand and invested the proceeds, in ten years, the ingredients for the lemonade would cost more than the money in the account.

Court Case

On August 4, 2010 Judge Greer hand down a Summary Judgment in
Food Lion, LLC, et al. ) v. Dean Foods Company, et al., )
No. 2:07-CV-188

This case is a parallel case to the Southeast dairy farmer case. Supermarkets are alleging Dean and DFA "fixed" prices:

This multi-district class action antitrust case involves allegations by plaintiffs Food Lion, LLC (“Food Lion”) and Fidel Breto, d/b/a Family Foods (“Breto”), on behalf of themselves and a class of all others similarly situated, 1 purchasers of processed milk, involving allegations against Dean Foods Company (“Dean”), Dairy Farmers of America, Inc. (“DFA”), National Dairy Holdings, L.P.(“NDH”), Dairy Marketing Services, LLC (“DMS”), and Southern Marketing Agency, Inc. (“SMA”) (collectively, “defendants”) for violations of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2.

The supermarkets are represented by one of the most reputable firms in antitrust, Akin Gump.

His Honor is not fully happy with the Plaintiffs. Most particularly he takes some shots at the plaintiff's "expert.":

In deposition, Professor Froeb admitted that he did not consider the relevant market in that context but rather that he used a “different approach” in arriving at his conclusions. Professor Froeb also admits that he did not assess the “commercial realities,” Id., but rather relied solely on his theoretical model. Such an approach may be academically acceptable; it does not, however, comply with the Supreme Court’s dictates with respect
to construction of the relevant geographic market. Furthermore, Professor Froeb’s construction of his model with reference to a single customer, Food Lion, also does not comply with the relevant legal requirements. Professor Froeb admitted that he constructed his model with reference solely to “the regions where Dean and Food Lion engage in the sale and purchase of milk.”

I would go a step further and say "such an approach" is practically required in academia. The difficulty of obtaining an "expert" cannot be overstated.

In any event the Judge dropped SMA as a defendant. He also dropped most of the claims (in large part because of the "expert"). He did leave one claim stand:

In Count I of the amended complaint, plaintiffs allege a violation of § 1 of the Sherman Act by Dean, DFA and NDH. More specifically, the plaintiffs allege a horizontal agreement among Dean, DFA and NDH to lessen competition for sales of processed milk to retailers in the southeast and, in fact, not to compete for such sales.

The case will move forward on the one count.

Visions of paint drying are appropriate.

Milk Production Slowing in East

It has been hot - very hot. The latest report on milk in the East is telling:

Milk production in the Northeast and Southeastern parts of the U.S. is
declining and in many areas dropping quite sharply. Hot temperatures, and in
instances near record setting temperatures, are the most significant factor in
the milk decline. Reports continue to indicate that solids content and
butterfat levels on incoming milk are lower than usual for this time of the
season. Milk handlers state that milk volumes are generally sufficient to
currently maintain bottling and processing schedules, but will not be
sufficient in a few weeks once school bottling programs resume. Milk is
starting to enter the Southeast from Northern areas this week. For the first
time this season, 35 loads of milk entered the Southeast, but did not flow as
far south as Florida yet. Florida milk handlers did not ship any volumes out
this week which was the first also for the season. Milk handlers state that
for the next 4 - 6 weeks, it will be very interesting to see what volumes of
milk will be needed to supplement shortages. At the current pace of milk
production declines, some are speculating that imports will be significantly
heavier this year. Cream markets are firm as prices continue to increase.
Cream suppliers and handlers are stating that there is basically no cream
available for sale. Some cream buyers are questioning what impact the recent
CWT bonus award for 1,700 MT of domestic butter for export will have on an
already tight butterfat supply. The shipment of this butter will be from now
through the end of November, when butterfat demand is typically at high levels
anyway. Often export butter is 82% butterfat versus domestic 80% which will
further absorb limited cream supplies. Condensed skim markets are generally
steady with a significant portion of condensed clearing the market versus
headed to the dryer.

Turning a New Page

(click on images to enlarge)

http://www.cwt.coop/sites/default/files/news_releases/CWT-export-assistance-bids-073010.pdf



Cooperatives Working Together (CWT) has just announced a new "export enhancement." This year, with U.S. prices below world prices exporting dairy products has not been difficult. I cannot remember a dairy trade balance so much in our favor.

Not sure why anyone would need a bonus, or just what they will do with it.

Fonterra's Auction

Today, August 3, 2010 Fonterra held another internet auction for three dairy products. Prices fell -8.3% from the last auction.

The auction sells, Anhydrous Milkfat (AMF), Skim Milk Powder (SMP) and Whole Milk Powder (WMP).

Translating to U.S.equivalent in pounds:

$1.57/lb for 80% bf American butter adjusted from AMF.
$1.256/lb for SMP.
$1.349 for WMP.

What does this mean - who knows? I am constantly having to tell people my crystal ball broke. There is some comfort from a Federal Reserve blog on predictions. See:http://macroblog.typepad.com/macroblog/2010/08/what-makes-forecasting-tough.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FRUQt+%28macroblog%29

Here's a quote:

"How do economists fare when it comes to real forecasting, to predicting [gross domestic product] GDP growth and inflation one year out? About as good as a coin toss, according to Bryan's research. Less than half the economists did better than the naive forecast, which is based on no understanding of the economy and merely assumes next year's outcome will be the same as this year's. It's what you'd expect if the results were purely random."

People seem to desperately want predictions, nevertheless, and pay "experts" good money to make useless predictions.

I think the point is - dairy farmers should be paid enough for their milk to make it through good times and bad. That is presently not the case.

Restaurant Sales

http://www.restaurant.org/pdfs/research/index/201006.pdf

Industry Outlook Softened in June as the
Restaurant Performance Index Declined
for the Third Consecutive Month
As a result of a dampened outlook among restaurant
operators, the National Restaurant Association’s
comprehensive index of restaurant activity declined for the
third consecutive month in June. The Association’s
Restaurant Performance Index (RPI) – a monthly composite
index that tracks the health of and outlook for the U.S.
restaurant industry – stood at 99.5 in June, down 0.3 percent
from May and the lowest index level since February.

(more at link)

Generally the soft "eating out" sales would be bad news for dairy but, there is talk about a large increase in frozen pizza sales for home consumption.

Recession & All Milk Price

(click on image to enlarge)

We have had two recessions in the past ten years as indicated officially, by the National Bureau of Economic Research (NBER).

The first was the dot.com bubble. This seemed to have no effect on farm milk price. The most recent recession time period, seems to be very much a factor in farm milk price.

In spite of all the talk about supply/demand, this most recent recession was about finance. Credit tightened and the buyers of milk were able to "extract" their needs from dairy farmers.

Officially, according to NBER we are out of the recession. However, there are many who talk about a double dip recession. That is, a second following on the heels of the first.

The possibility of a double dip is a genuine cause for concern.

Although, officially we are out of the recession, to most people we may as well still be in recession. We are likely to have a "jobless" recovery. That will keep them down on the farm.