Another one of the challenges in 2009 is in California where dairy producers and their organizations are agonizing over the decision whether to become a federal order in view of the recent decision by the California Department of Food and Agriculture to reduce the state’s Class I milk prices.

“California is no longer isolated,” explained Jeff VandenHeuvel, Vice Chairman of Chino-based Milk Producers Council in Wednesday’s DairyLine. “For many decades we were able to do our own thing,” he said. “We had a low cost of production relative to the rest of the country and we had a Class I market that nobody else could reach because we were isolated from the rest of the country.”

The barriers have been broken down the last 10-15 years, according to VandenHeuvel, and plants and dairies have been built just over the border “for the specific reason of exploiting the fact that the state order cannot regulate interstate commerce.” He said that officials who run the state order have decided to “keep discounting the California Class I price to a point where it makes no economic sense to bring any milk in here.”

For California dairy producers, that means that the amount of revenue they would normally expect to come in from Class I sales is not going to be there, VandenHeuvel warned, amounts to millions of dollars and “happens at a time when the cost of production advantage that California historically has had, has evaporated as well.”

VandenHeuvel said it has become very expensive to produce milk in California and competitors like Texas, New Mexico, and Idaho “can fully match us in cost of production so something absolutely has to change and a federal order is a very viable option for California and we need to take a hard look at how to do that.”

“We could continue to sell our milk cheap,” he concluded, “It would be foolish to do that but we’ll see whether the leadership of California is willing to step up and take a serious look at a federal order. They have not been willing to do that so far but there’s nothing so powerful, as an idea whose time has come. This is clear.”
 
Western United Dairymen has notified DairyLine that they will hold industry wide meetings for California dairy producers and processors in February to present an in depth analysis of the federal order issue. Milk Producers Council newsletter has more here.

One of the challenges of 2009 will be milk prices and the big question now is, are we close to the bottom on cheese prices. Blocks slipped another quarter-cent lower in the first day of trading since the Christmas break, to $1.2675 per pound, while barrel was unchanged, holding at $1.3075, 4 cents above the blocks.

The University of Wisconsin’s, Dr. Brian Gould, said in Tuesday’s DairyLine, if you look at the 2009 futures market, it’s almost two different years. The Class III milk price average for the first half of 2009, as of December 24, was $12.22, with a low of $11.56.

There is a recovery in the second half of the year, he said,  as the average is $14.46, and “After we get through January and February, the market thinks there’s going to be a steady increase in that Class III, depending what causes that Class III, or whether the Class III affects the cheese price, the chicken and egg question.” Gould says we could see a recovery in the second half of 2009

But, dairy producers appear to be thinking something different. The latest Livestock Slaughter report shows 208,200 culled dairy cows were slaughtered under federal inspection in November, down about 9,200 head from October and 28,000 less than November 2007. For January to November, cull cow slaughter totaled 2.3652 million head, up about 70,300 from the same period in 2007.

Gould warned that farmers are not reducing their herds as much as we would think and that could mean more downward pressure on the milk price. He raised the issue of the impact of the CWT herd removal but did not have an answer.

When asked about the butter market, Gould said the Class IV is about as low as you can go, a little above $10.00 per hundredweight, but he doesn’t see it going much lower. Butter stocks are not abnormal, Gould concluded, although the export market is softening.

Will California become a federal milk market order?  Dairy producers and their organizations are debating the pros and cons of doing so in light of the California Department of Food and Agriculture’s decision to reduce Class I milk prices there.

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Will California become a federal milk market order?  Dairy producers and their organizations are debating the pros and cons of doing so in light of the California Department of Food and Agriculture’s decision to reduce Class I milk prices there.

More Dairy News

Pizza has been a life line to the dairy industry as more and more milk finds its way into the vat for pizza cheese instead of the bottle. But that growth has cooled some and the dairy check off is partnering with the pizza industry to reinvigorate the pizza category.

Dairy Management Incorporated’s, Joe Bavido, reported in Monday’s “DMI Update” that an industry task force has been created to develop an action plan for the dairy and pizza industry to reinforce pizza as the favorite choice of American consumers.

Increasing cheese on pizza is key to increasing overall pizza sales, according to industry experts, Bavido said, and “If you’ve been to any of the pizza chains lately you may have noticed they have reduced the amount of cheese their pizza.

Pizza sales directly affect overall cheese sales, according to Bavido, as about 25 percent of total cheese is used on pizza and that represents more than 25 billion pounds of annual milk production.

DMI is working with Domino’s Pizza to introduce a line of high quality specialty pizzas that will use up to 40 percent more cheese. DMI, together with the state and regional organizations, will invest some $10 million to support the launch of this campaign nationwide.

Producer funded efforts will support Domino’s franchisees in advertising, public relations, local market promotions, and communications activities and, with Domino’s investment, will result in about four times the initial investment of dairy producers.

The partnership will measure the overall increase in pizza and cheese sales in the test markets, he said, and how those changes in unit pricing at the consumer level affect total sales.

“DMI’s partnership with Domino’s and others in the pizza category can help lead to increased cheese sales on behalf of U.S. dairy producers,” Bavido concluded.

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The cash block cheese market slipped a quarter-cent Monday and closed at $1.2950 per pound. The government support price is $1.13. Market analyst, Alan Levitt, editor of the CME’s Daily Dairy Report, said in Tuesday’s DairyLine that he’s not sure the price will fall that far but holiday needs have been met and, with the end of the year approaching, no one wants to add inventory. Credit issues mean no one wants to pay for inventory and people are being very passive now.

On the other hand, Levitt said he wouldn’t be surprised if the market bumped up some after the first of the year, once people figure out how much cheese has actually moved over the holiday period. He reminded us that, last week, Jerry Dryer reported that cheese sales have been decent.

The market is being driven by intermediate demand, according to Levitt. People don’t want to buy an extra load or hold an extra load in storage and, “If we can get through the next couple weeks, we may actually see a little bit of a bump.”

“It’s been a couple years since cheese has been this cheap, Levitt said, “And people may look at picking up some more and putting it away in aging programs. You can go too wrong buying cheese at $1.30 in this day and age.”

Butter is at a five and a half year low, having been on a downward spiral the last couple months, once commercial exports dried up. The CWT program has helped keep some butterfat moving overseas, he said, but it hasn’t been enough so that price is heading toward support just as powder is already.

Last week’s Milk Production report shows that the signal still hasn’t got to farmers, according to Levitt. It’s the “quirk of the lags of the pricing signals,” Levitt said, and even though costs are up and profitability isn’t necessarily up, “milk prices have been pretty decent throughout this year.” The All Milk price will average about $18.35, he said, down about 75 cents from a year ago, but still a very strong year.

Producers are still adding cows, Levitt explained, with November cow numbers in the 50 states up 5,000 head in the 50 states and “they haven’t got the signal yet even demand has pulled back and by all rights, supply should be contracting.” “December prices will be decent and January won’t be too bad,” Levitt concluded. “February is where, by the time the lags flow through that’s where things are really going to bite hard.”

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The January 2009 Federal order Class I base milk price was announced this morning by the Agriculture Department at $15.74 per hundredweight, up 31 cents from December but $5.23 below January 2008. The advanced Class III pricing factor remained the “higher of” in driving the Class I value.

The NASS-surveyed product price on butter averaged $1.3262 per pound, down 32.6 cents from December. Nonfat dry milk averaged 84.6 cents, down 1.6 cents. Cheese averaged $1.7989, up 5.7 cents, and dry whey averaged 17.16 cents per pound, down 1.8 cents from December.

California’s January 2009 Class 1 price is $17.42 per hundredweight for the North and $17.69 for the South. Both are up 85 cents from December but are $5.54 below January 2008.

Members Committing to Dairy Self-Help Program for 6^th Year 

ARLINGTON, VA – Cooperatives Working Together has received commitments from its members that they will continue to fund the program in 2009, CWT officials said today. 

“Now more than ever, CWT is the only answer to the question of what can farmers do to positively impact their milk price,” said Jerry Kozak, President and CEO of NMPF, which manages CWT. “Both world and U.S. dairy markets are sagging and things look tough for 2009. Our members recognize that this program is the best way to help balance supply and demand and positively impact producers’ bottom line.” 

CWT is currently in the process of removing 184 herds, with 61,000 cows that produced 1.2 billion pounds of milk, through its second herd retirement of 2008. CWT’s first herd retirement of the year removed 25,000 cows that produced 430 million pounds of milk. In addition, its export assistance program has helped members sell overseas the equivalent of more than two billion pounds of milk in 2008. 

“With the continued investment individual producers and cooperatives are making, CWT will have the financial resources to remove more cows, and export more products, that will help battle the decline in dairy prices in 2009,” Kozak said.

 An independent economic analysis of CWT, conducted this fall by Dr. Scott Brown of the University of Missouri’s College of Agriculture, demonstrated that farmers’ return of investment in CWT has been 76 cents per hundredweight. Moreover, Brown’s analysis showed that the return farmers enjoy grows as the program develops over time.

The daily trading of cheese at the Chicago Mercantile Exchange is a big factor in producer milk prices and this is the time of year where cheese sales are the highest. Christmas used to be the biggest cheese selling time of the year, according to analyst Jerry Dryer, editor of the Dairy and Food Market Analyst and chief market analyst for Rice Dairy in Chicago.

Christmas may still be number one, considering all channels, Dryer said, but in the retail side of the business, it’s the week preceding Super Bowl Sunday because there’s so much entertaining going on at home, etc.

There’s a huge push through other channels because of Christmas, Dryer said. Food service ticks up during the holiday entertaining, he said, and “one area we don’t have our arms around at all in terms of measuring the size of it, is the gift giving in cheese at Christmas time, the mail order side of the business and the boom in small retail specialty cheese shops etc. Those numbers don’t get reported in the Nielsen or Information Resources data that monitors super markets with sales above $2 million per week.

Christmas is still the big seller, according to Dryer, and those sales begin to kick in September as cheese is ordered and winds its way through the distribution process to get on to the retail shelf for Thanksgiving, Christmas, Hanukkah, New year’s Eve, and then Super Bowl.

Cheese sales this year appear to be very good, according to conversations Dryer has had with those in the business. There have been some significant promotions at retail, something he monitors, and they have involved advertising in the food sections of major metropolitan newspapers. There has also been a great deal of signage and promotion in stores, he said, with big discounts “Because cheese prices came off their highs of the year, early enough to facilitate some good discounts.”

Private label cheese sales have been very strong, according to Dryer, and branded sales appear to have been good as well.

The cash cheese market is correcting after “being at a level that was too high for too long” according to Bill Brooks, dairy broker of the Downes O’Neil Dairy team. He said there’s still a decent amount of blocks out there, but barrels are a little tighter.  

The inverted spread is indicative of fewer supplies of barrels over the past decade. “Barrel capacity is shut down, but also more recently a shift in consumer buying patterns to more products with processed cheese on it that’s probably helping keep demand for barrels much stronger than maybe what we anticipate,” Brooks said.  

Meanwhile, there’s a potential for the butter price to rebound, especially with the spread between the retail price of butter and the wholesale price in Chicago . “We didn’t anticipate it occurring quite this quickly,” Brooks said. Inventories are relatively low compared to where we’ve been at the last few years, so there is room for commercial entities to hold on to butter and maybe keep that price from dropping any further.  

Brooks said there’s potential to see some additional gain, even though we’re not seeing a great deal of demand right now because of where the price is at the retail level. “But hopefully we’ll see some of the prices in stores come down to spur some addition to the demand so we can keep inventories from building a great deal.” He said.  “This is historically the time to see butter stocks start to increase and continue into the middle part of next year,” he concluded.

The U.S. Dairy Export Council (USDEC) warns that the international economic credit crisis could keep world dairy markets depressed for most of 2009 but “long term drivers should rouse demand by 2010.”

USDEC’s, Margaret Speich, reported in Friday’s DairyLine that other analysts agree and she said the current economic situation has “pinched” global  dairy demand at a time when global milk supplies are on the rebound.

Consumer spending around the world has slowed due to inflation, inventories are thus growing, and the credit freeze has made it difficult for companies to finance existing stocks and to finance new purchases.

Recovery will happen, according to Speich, but will depend on the length and depth of the global recession. However, “the structural trends and fundamentals for U.S. dairy exports are still in tack,” she said, namely population growth, Westernization, and urbanization, will continue to drive global dairy consumption and, once that demand picks up, analysis like Rabobank and others, believe low-cost producers like Australia, New Zealand, South America won’t be able to keep up with demand.

Global supplies of dairy products the past year were limited, mainly due to draught in Australia and New Zealand and that fueled U.S. dairy exports, but that situation has turned around however recent reports are indicating that Oceania milk production is not as strong as thought.

Stocks in Oceania are very heavy, Speich reported, buyers are “sitting on their hands,” and New Zealand is “aggressively lowering prices in an attempt to move product” and, “while their milk production growth may not be as robust as originally thought, we’re still facing the softness of global demand.”

“We’re really focusing on that demand part of the equation,” Speich concluded. “Yes, we’ve seen a bit of an uptick in New Zealand but demand is what we really have to watch for at this time.”

MORE DAIRY NEWS HERE

This morning’s cash dairy markets weren’t buoyed by the CWT herd removal announcement yesterday. Block cheese plunged 18 cents, dipping to $1.5750, the lowest level since April 2007, and barrel plunged 22 1/2 cents, to $1.5225.

Cash butter dropped 6 3/4 cents this morning, to $1.13, the lowest it has been since June 2003.