Survival in Tough Times

When the dairy industry is in financial turmoil, it is not the processor or retailer who suffers, it is the producer.  The typical producer approach is to cut all expenses and hold on tight.  Although no surveys have been done on this, the general consensus is that most producers use the "cut all expenses" approach in tough times.

While this post is intended for all U.S. producers, the message is especially important for California producers who will be new to the FMMO formulas for minimum pay.

About ten years ago, this writer developed the website Milkpay.com and milkpay apps for mobile users.  It is intended to simplify the analytics of evaluating specific changes, primarily in feed.  The value of milk protein, butterfat, and other solids is updated monthly, so the analytics always show the economic impact at current prices.  If there are additional bonuses for certain components, those can also be added to calculate the true impact for a specific herd.  In this post, the milkpay web site has been used to show the impact of nutritional changes that can have a positive or negative impact on revenue and cash flow.

Table I below shows the impact if the nutritional changes get an additional .1% in butterfat.  Table II shows the impact if nutritional changes get an additional .1% in milk protein.  Table III shows the impact of nutritional changes when both butterfat and milk protein increase by .1%.  The cost, if any, of making the nutritional changes is not shown because every herd is fed differently and the cost of the change will be different.  Typically, the cost varies between nothing and $.10 per day.  A nutritionist who has up-to-date software that accurately calculates the cost of nutritional changes can best calculate the change in feed cost.    The last table, Table IV, is based on a compilation of results from carefully monitored herds that have implemented nutritional changes to maximize components.

While Tables I and II show the revenue by specific components, most nutritional changes will impact both butterfat and milk protein development.   All calculations are based on cows averaging 65 lb. of milk per day.  Each of the tables below show the financial impact in revenue on a per cwt. basis and a per cow basis.   While these tables show the specific impact on revenue, there are other significant advantages in herd health when a diet balanced for amino acids is fed.

In Table I below, a small change in butterfat is evaluated.  In this analysis, if butterfat was increased from 3.5% to 3.6%, the increase in revenue at current values is worth $.25 per cwt. of milk and at 65 lbs. of milk per day, the increased revenue per cow is $.16 per day.

Table I - Revenue Impact from Increasing Butterfat by .1%

Table II illustrates the financial impact when milk protein is increased from 3% to 3.1%.  At current prices, that would increase revenue by $.15 per cwt. or $.10 per cow per day.  While the value of milk protein is currently low by historical values, it is still a strong contributor to increased revenue.

Table II - Revenue Impact from Increasing Protein by .1%

Table III shows the impact of increasing both butterfat and milk protein by .1% each.  Even though the changes in components are very small, the increase in revenue is substantial.  Revenue per cwt. increases by $.40 and revenue per cow increases by $.26 per day.   When nutritional changes are made, typically both milk protein and butterfat increase
.

Table III - Revenue Impact from Increasing Protein and Butterfat by .1%

Table IV shows a more realistic impact from amino acid balancing.  In this case butterfat is increased by .18% and milk protein is increased by .14% and milk volume is increased by 2 lb. per cow per day.  The resulting improvement in revenue is $.66 per cwt. or $.73 per cow per day.

Table IV - Revenue Impact from Diets Balanced for Amino Acids

All of the results displayed above increase revenue more than the cost of feeding a diet balanced for amino acids.   There have been articles by other well-respected nutritionists on this subject with the same advice.  Precise changes can produce better results than a shotgun blast of "reduce all expenses."

Cheese Exports Improve - Is it Enough?

Export/import data for the first half of 2018 is now available.  In summary, Nonfat Dry Milk (NDM) exports are up and they are setting record highs, cheese exports are up, but are still not at record levels, and butter exports are also up, but they are small and not near record levels.

In this post, the first half export/import data will be reviewed comparing the 2018 data from the first half of the year to the data for the first half for the years 2000 to 2018.

The first to be reviewed will be NDM as it is the star performer of dairy exports.  As seen in Chart I, exports are at extreme record levels.  This is the second year of major export increases and the 2018 increases are up over 20% from 2017.  Imports are pretty steady compared to the last four years.  The gains in NDM exports are an amazing achievement.

Chart I - First Half NDM Exports and Imports

The NDM exports are going primarily to Mexico with some nice gains in Indonesia and Vietnam.  NDM sales to Mexico are not in danger of tariffs as the retaliatory tariffs levied by Mexico are only on one dairy product, cheese.  While prices are low, there seems to be momentum for further NDM export increases.

Chart II - First Half NDM Exports by Country

Chart III shows the H1 exports for cheese.  The good news is that cheese exports are increasing and imports are decreasing.  However, exports have not reached the level of 2014.  To help reduce cheese inventories, exports will have to reach heights well above 2014 levels.  Cheese exports for the first half of 2018 accounted for 6.4% of production vs. 6.1% for the first half of 2017.  As stated above, NDM exports are up more than 20% by volume for the first half of 2018 vs. the prior year while cheese exports are up only 7% for the same time periods.

Chart III - First Half Cheese Exports and Imports

U.S. Cheese exports show increases for most all major importing countries in the first half of 2018 (Chart IV).    While that shows success, cheese exports are not meeting the needed volumes to match milk and cheese production.

Chart IV - First Half Cheese Exports by Country

Butter exports remain very small (Chart V).  By comparison, NDM (Chart I) show exports approaching 350 KMT per half year, while butter exports are in the range of 25 KMT per half year.  Butter exports and imports are currently pretty equal, so net exports are near zero.

Chart V - First half Butter Export and Imports

The butter exports go primarily to Canada, and in 2018 exports to Mexico have increased significantly.  All other butter exports are negligible. 

Chart I - First Half NDM Exports and Imports

Imports come primarily from Ireland and are the cultured butter marketed as "Irish Butter."  This butter is unique and has established a significant following.  

Chart VII - Butter Imports by Country

The first half was a positive period for exports with many gains.  However, the gains needed to improve producer prices require more emphasize on cheese exports.  If the gains in cheese exports were up 20% like the gains in NDM are, producer milk prices would be quite a few dollars higher.  The goal for cheese exports is clear, but execution is lacking.

EXCHANGE RATES

Exchange rates show the USD getting stronger.  This is not good for exports.  A stronger USD makes U.S. products less competitive in the international markets.  On the graphs below, three out of four of the charts, show the USD getting stronger.  The Mexican peso is the only currency that is getting stronger against the USD and that increase is only for the last monrh.  Because Mexico is the largest market for U.S. dairy products, the stronger Mexican peso will help U.S. dairy exports.  

The 25% Mexican tariff on U.S. cheese will probably be short lived.  It should be noted that cheeses imported into Mexico from other countries also carry a 25% tariff.  With other exporting countries dealing with a 25% tariff on cheese imports to Mexico, and a weaker USD vs. the Peso, the current impact of a 25% tariff on U.S. cheese should be a small issue.  It appears that the NAFTA negotiations are going well, so the 25% tariff on cheese will probably be short lived. 

Chart VIII - Exchange Rates USD vs. Euro

Chart IX - Exchange Rates USD vs. NZD

Chart X - Exchange Rates USD vs. Mexican Peso

Chart XI - Exchange Rates USD vs. CAD

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More Low Milk Prices - When will Prices Improve?

July Class and Component Prices were announced on August 1.  The Dashboard of prices (Chart I) shows it all.  The only thing that was up was dry whey, which increased the price of Other Solids, which is a small factor in the Class III price.

Chart I - Dashboard of Dairy Prices

The price of Class III milk is stagnant (Chart II).  For the last three and a half years, the Class III price has ranged of $13 to $17/cwt.  That is a record long period for relatively low prices. 

Chart II - Class III Milk Price- 

And the price is not only low and stagnant, but it is also slightly declining as shown in Chart III.  The numbers indicate a trend to lower Class III prices.

Chart III - Milk Price for Last Three and One Half Years

Chart IV shows the price of cheese.  Comparing it to the Chart II, the price of Class III milk, the charts look identical except fo the color of the line.  Clearly, the Class III price does follow the cheese price (click here for more detailed proof). 

Chart IV - Cheese Price

Butter prices have been increasing for at least ten years (Chart V).  It is not a short-term trend.  The rise in the value of butterfat is driven by the increased domestic and global consumption of butter.   Unfortunately, a higher price for butter does very little for the Class III price.  It primarily increases the value of butterfat and decreases the price of milk protein.

Protein has decreased in value for four years.  The protein price has decreased for two reasons, the increase in the value of butter and the decrease in the value of cheese.  Cheese has suffered because inventories have been too high.  The strong global demand in 2014 and the oversupply of milk have encouraged production of excess cheese.  The strong exports of U.S. cheese quickly diminished after 2014, but cheese production continued as milk was plentiful and cheap.  The result is too much milk, too much cheese and resulting low prices.

Chart V - Long Term Component Prices

So where is all this taking the dairy industry and when might milk prices improve?  There is clearly too much U.S. milk.  There needs to be a reduction in milk production.  This seems to be a slow process.   The most recent data comes from the National Agricultural Statistics Service (NASS).  The monthly data is compiled monthly for the 23 states that make up over 90% of the U.S. milk supply.  This data is current through the first half of 2018.  While there is news of herd reductions forced by lower prices, the reduction in cows has not happened.  As cows become more productive, milk volumes have continued to increase per the USDA-NASS statistics.   June 2018 milk production was up 1.3% over the prior year.  CONCLUSION: The oversupply milk will continue.

Where are butter prices going?  As long as the consumption of butter increases as it has been doing (see prior post), supplies will be limited and prices will be high.  What holds butter churning back?  Butter is a unique dairy product because it requires only one component in the milk, butterfat.  That leaves a lot of skimmed milk, which must be sold as products like Nonfat Dry Milk/Skimmed Milk Powder (NDM/SMP).  While there is a large international market for SMP, there are a lot of strong competitors also facing oversupply.  CONCLUSION: Butter churning will increase only gradually, leaving inventories tight and prices high.  NDM/SMP prices will remain low with a global over-supply.

Where are milk protein prices going?  With a high price for butter and an oversupply of milk, cheese production will remain excessive and inventories will remain high.  CONCLUSION: Milk protein prices will remain low.

How can exports impact the above?  Dairy exports are in a sense a compelling devil.  When exports are strong, it seems like a panacea and a solution to achieve robust dairy product demand (eg. 2014).  But exports can be very volatile, and disappear as quickly as they appear.  On the other hand, milk production is difficult to quickly increase or decrease.  Cows cannot just be fired or put on leave until volume demand returns.

How can a producer best manage in this environment?  Obviously, a producer has to be a very low cost producer.  However, components are key.  Fluid milk is dying a slow death, and growth products are centered around components, specifically butterfat and milk protein.  Both provide substantial revenue.  Just being low cost does not make for a profitable business.  A concentration on maximizing components is also a necessity for survival.  

Low Somatic Cell Count Provides Revenue for Four FMMOs, But Not California

There are four Federal Milk Marketing Orders (FMMOs) that get a Somatic Cell Count (SSC) financial adjustment in their milk check.  This is part of the USDA rules and formulas for calculating producer milk prices.  Graphic I below show the four that get an adjustment.  It is called an adjustment, because it provides a bonus for a low SCC and a penalty for a high SCC.  Below 350,000 cells per milliliter there is a bonus and above 350,000 cells per milliliter, there is a penalty.   The four FMMOs that receive this adjustment are in the central part of the U.S.  They are the Upper Midwest, the Mideast, the Central, and the Southwest.  

Graphic I - Map of FMMO receiving SCC Adjustment

When California is added as an FMMO, producers in California will not participate in this adjustment.  In the "Regulatory Economic Impact of the Final Decision to Establish a California Federal Milk Marketing Order" produced by the Agricultural Marketing Service (AMS), California is consistently compared to the Upper Midwest FMMO.  However, there are many differences between the new California FMMO and the Upper Midwest FMMO.  Some of these differences was discussed in a recent post to this blog.  Differences in the rules governing SCC are discussed in this post.

The SCC is primarily a measure of the dead white blood cells that are disposed of through milk secretion.  In a sense, the white blood cells are the soldiers fighting infections, primarily mastitis, which have died in the battle.  High SCCs in milk are an indication of milk from a sick cow.  There are SCC limits required for the milk to be Grade A.   The Federal limit is 750,000 cells per milliliter, but California has a tighter standard of 600,000 cells per milliliter.

The good news is that SCC is consistently and significantly declining, principally through better sanitation efforts.  Charts I and II below show this graphically.  Data from the four FMMOs participating in the SCC adjustment is used to demonstrate the improvement because it is data that has been consistently compiled since the beginning of 2000 and is carefully monitored because money is involved.  

It is impossible to totally eradicate SCC, and some experts believe that a minimum of 150,000 cells per milliliter is as good as it can get in summary.  However, the long-term trends shown in Charts I and II suggest that some improvement below 150,000 is possible.  Because there is a limit to what is possible and practical, Charts I and II below will level out at some point.  However, It has achieved a point thought impossible by some experts and is still improving.  

Chart I - SCC for the Four FMMOs that have a Fnancial Adjustment

Chart II below shows the SCC data for the Upper Midwest, which was used as a comparison in the AMS paper mentioned above.  The SCC in Charts I and II show a trend approaching 150,000 cells per milliliter.

Chart II - SCC for the Upper Midwest FMMO

What is this worth for the four FMMOs who get this adjustment?  By the data above, it is obvious that there are few instances above 350,000 cells per milliliter, so there is rarely anyone receiving a financial penalty.   The payment is based on the formula shown below: 

  Somatic Cell Count Adjustment/cwt. of milk = cheese price x .0005 x 

(350,000 - Actual SCC) /1000

At a level of 200,000 cells per milliliter and at today's depressed cheese prices, a producer receiving a SCC adjustment would realize about $.12/cwt. upward adjustment.  At the peak price for cheese, and at 150,000 cells per milliliter, it would be worth about $.24/cwt.  Is this significant?  When combined with an adjustment for not having "quota" in California, and a probable negative Producer Price Differential, California non quota milk will be lowest priced milk in the U.S.  Processors can pay more, if negotiated, but the FMMO pricing sets a minimum and most of California's milk will have the lowest price in the U.S.  

In the Upper Midwest, there are frequently bonuses for higher milk protein levels because the protein is needed for efficient cheese making.  When California is an FMMO, there will almost certainly be bonuses above the FMMO minimum price, but that FMMO price less the CDFA non quota adjustment will be a low starting point.

Why is there no SCC adjustment for California when it becomes a FMMO?  In response to an inquiry to AMS they simply stated that "(SCC adjustment) was not proposed by any of the proponents and therefore it was not considered by the USDA."

The other difference in SCC rules that differentiate California from the rest of the U.S.  is the limit for being classified as Grade A milk. As stated above, to be accepted as Grade A milk, the U.S. standard requires a SCC of less than 750,000 cells per milliliter.  California has a slightly tighter standard of 600,000 cells per milliliter.  While today's levels of SCC are well below either of these, it does make the California standard slightly more difficult to qualify as Grade A.

Future posts will continue to analyze the new California FMMO.