One Class for Manufacturing Milk?

Someone asked about one class for all manufacturing milk. Superficially, this may seem to be just fine, at least to those supporting S1645.

However, the problem we face with generating a new pricing system is the need for input from many more a sectors.

The problem with the one class approach can easily be understood by thinking of one price for all female bovines. If the price is adequate for a newly fresh cow, who would pay the same for a heifer calf?

Obviously, the whole pricing structure would break down with a one price system for either cows or milk.

Fonterra, at the end of the milk season, prorates the value of each product it has sold and then divvies up the proceeds. Fonterra is going to sell everything for waht ever it will bring.

Class III Milk

The major factor in farm milk price Cheddar cheese traded at the CME. The trading of Cheddar sets Class III farm milk.

Cheddar, officially, has a yield, officially of 10 pounds, with a maximum moisture content of 39% of 10 pounds per hundredweight. Never mind that the yields obtained through fortification are 13.7 pounds per hundredweight.

Mozzarella, on the other hand has a maximum moisture content of 60%. Therefore, if made in the traditional manner, the yield is much, much higher than Cheddar. Yet, the mozzarella maker pays the same price for the milk as the Cheddar maker.

At the time manufacturing milk was first thought up, mozzarella was virtually unknown.

So, should there be several Class III prices?

Classification of milk

There is quite a bit of discussion about how many classes of milk should be out there. This raises at least two questions. First, should farm milk price be based on the value of the product or as some say they don't care what happens to the milk after it leaves their farm as long as they get a "fair" price.

However, the farmer has a real interest in all the milk being used at the highest value.

Secondly, in the early days of milk pricing fluid milk was the product with the most value. So, one could say there has always been a relationship between the farm price and the consumer price. Well, at least until recent years.

In the most recent Dairy Market News, condensed skim solid for the Northeast are listed as, $1.20-1.30 per pound of solids. there are 8.6 pounds of skim solids per hundredweight. The April Class II skim price was $8.52.

If the condensed skim is converted to yogurt the retail value is just under $50 per hundredweight. On top of that there is still about $9 of cream wholesale.

If you put the same milk in a gallon jug, you have $36 retail value - $23 less than the same milk going to yogurt.

In the old days, the value of farm milk was based on the highest retail product and the declining shelf life of the the rest.

Perhaps, we need more not fewer classes of farm milk.

Money Rising

Yesterday the Bureau of Economic Analysis (BEA) released its "corporate profits" report. Bloomberg summarized it:

Corporate profits in the first quarter advanced to an annualized $1.393 trillion from $1.270 trillion the prior quarter. Profits in the fourth quarter were up an annualized 44.8 percent, following a 37.0 percent jump the prior quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are up 42.7 percent on a year-on-year basis, compared to up 51.8 percent in the fourth quarter.

At the same time unemployment is the highest it has been since the Great depression. Half of those unemployed will, according to some experts, never have another job. According to the Bureau of Labor Statistics:

Among the marginally attached, there were 1.2 million discouraged workers in
April, up by 457,000 from a year earlier. (The data are not seasonally adjusted.)
Discouraged workers are persons not currently looking for work because they be-
lieve no jobs are available for them. The remaining 1.2 million persons marginal-
ly attached to the labor force had not searched for work in the 4 weeks preceding
the survey for reasons such as school attendance or family responsibilities.

Obviously people at the top do not care.

The lesson here, and I think it is a big lesson, those who remain actually doing something are having a greater share of their efforts captured by those at the top. there is plenty of money in the market chain for a decent farm milk price.

Credit Rating

http://quicktake.morningstar.com/Stocknet/san.aspx?id=338969

Morningstar is initiating credit coverage of Dean Foods DF with a BB rating, reflecting the company's narrow economic moat and leading position as the largest processor and distributor of milk and related dairy products in the U.S. Offsetting these strengths, Dean Foods' Cash Flow Cushion is rated poor on the basis of the significant amount of term loan amortizations and repayments due over the course of next five years. In addition, we forecast that Dean Foods will need to tap the capital markets to refinance debt as it matures. Our Solvency Score is also poor because of the company's high balance sheet leverage and low interest coverage ratio.
As the largest dairy company in the U.S., Dean Foods' portfolio includes more than 50 local and regional brands, as well as private-label offerings, which are sold through retailers, food-service outlets, and educational facilities. With sales about 5 times greater than its closest competitor, Dean Foods dominates the highly fragmented dairy category. Acquisitions have contributed significantly to growth, as the firm has completed more than 40 acquisitions since 1994 and has increased revenue 37% compounded annually, from $150 million in 1994 to $11 billion in 2009. Most recently, Dean acquired Alpro, a leading European player in the branded soy-based beverage and food product market, in order to expand its scale and to extend its product portfolio.

The firm is working to improve its cost structure by eliminating redundancies, closing facilities, and streamlining distribution and production. Initial results from its efforts to improve routing technologies and sales standards are positive, as Dean has already eliminated more than 250 delivery routes and reduced the gallons of fuel used by more than 5% despite increasing the total gallons of product delivered. The firm should benefit from these efforts to streamline its cost structure, but we aren't convinced these actions will be enough to offset intense competitive pressures and continued volatility in input costs.

While Dean Foods has raised equity twice ($400 million in February 2008 and $410 million in May 2009) to repay debt, management's ill-timed decision to saddle the firm with debt to pay a $1.9 billion special dividend to shareholders in 2007 has only increased the volatility inherent in Dean's results. Beyond the risks associated with its significant leverage, consumer spending remains tight, and we are concerned that consumers who traded down to private-label dairy offerings may not trade back up to branded products when the economy improves. In addition, Dean is under significant pressure from major retailers (which are pushing their private-label offerings) and competitors (which are taking aggressive pricing actions).

Dean Foods reported total sales of $11.2 billion and EBITDA of $907 million for fiscal 2009, resulting in interest coverage of 3.6 times, a debt/cap ratio of 0.76, and leverage of 4.8 times. We forecast fiscal 2010 sales will increase 3.7% to $11.6 billion and EBITDA will increase 6.5% to $966 million. As a result, we project interest coverage of 3.2 times, a debt/cap ratio decrease to 0.72, and leverage declining to 4.3 times. On the basis of Dean's current cash balance of $48 million and our five-year cash flow generation forecast of $2.4 billion, the company will not cover total cash commitments of $4.8 billion and will need to refinance indebtedness as it matures.

Who are the traders?

Ron O'Brien has provided an opportunity to follow the trading on the CME:

Free Daily CME Spot Dairy Market Conference Call
Would you like to listen to the CME Spot Dairy Market's live without opening your checkbook?
Conference call will be live from 10:40am CST until Cash Butter wraps up. CME spot markets (Blocks - Barrels - Powder - Butter) trade between 10:45am and 11:15am CST.To listen live, Dial 1-213-289-0500. When prompted, enter the participant access code of 33139 #. During the conference call your voice will automatically be muted. Standard long distance rates apply.

Free Daily "Dairy Market Updates" via prerecorded voice messages
Would you like to know what happened in the cash Dairy markets but don't have the time to listen to the conference call? Rko2.com prerecords and delivers two separate voice messages (all under 2 minutes) directly to your phone.The first update wraps up the CME spot dairy auction as well as informs the listener as to what the commodity futures markets are doing as of 11:15 cst.The second prerecorded phone call briefly summarizes all daily trading in the Dairy, Grain, Cattle, Energy and any other related commodity futures markets. That update should reach you within minutes following the 1:15pm cst Grain market close. I must have your permission in writing, via email to ron@rko2.com along with your name and phone number to receive this service.

Free Weekly Newsletter
Titled "DairyPost". Newsletter can be found @ 7am est. every Monday on www.DairyPost.com or a copy can be sent via email or fax. To receive a copy via email, please sign up for the newsletter at the top of the www.rko2.com homepage.

This service will only provide "floor trader's" symbols. The traders trade for the same parties.

My suggestion is to keep a list which, even though the exact information on the trader is not there you will be able to see the number of traders.

This is a thin, thin market.

Mercy for Animals

There is a link traveling the Internet today of "Mercy for Animals'" undercover video of Conklin Dairy workers in Ohio. I cannot watch those things happening to animals.

However, it seems to me that we reward treating dairy cows as things. For workers on the lower end of the reward chain, what signal is being transmitted?

W.D.Hoard had a sign in his barn about respecting the cows. Dostoevsky in his famous novel "The Brothers Karamazov" wrote:

Love the animals: God has given them the rudiments of thought and joy untroubled. Do not trouble it, don't harass them, don't deprive them of their happiness, don't work against God's intent. Man, do not pride yourself on superiority to the animals; they are without sin, and you, with your greatness, defile the earth by your appearance on it, and leave the traces of your foulness after you -- alas, it is true of almost every one of us!

My question is how can people expect caring for anybody or anything when there is little reward? I know all the arguments about caring for the property called the cow. Has the trend been to have those who truly like cows, survive"? Or is it all the bottom line?

There are some serious contradictions in our system which need to be examined.