Milk Again

Some of you are probably getting tired of me talking about the dairy industry and the

Screen Shot 2017-04-27 at 6.43.56 AM
Cow is angry.

problems it faces, but I ran across an editorial over at Wisconsin Agriculturalist that was really well written and well thought out that talks about the situation the dairy industry is facing. Go give it a look if you have a few minutes.

The writer brings up a lot of points that I’ve talked about myself, or have at least thought about. I wanted to pass some of that along with my own thoughts on the subject. So if you’re sick of me babbling about dairy farming, feel free to skip this one. I won’t blame you at all if you do.

As the author points out, blaming Canada for our overproduction problems down here is just plain stupid. He doesn’t use that word. He’s more polite than I am.

Blaming Canada for our problems and Grassland cutting off some 75 or so farmers from a market for their milk is stupid. Demanding that the government “do something” to change Canada’s milk production and marketing system because of our problems down here is sort of like a kid demanding his parents take away his friend’s Playstation because he doesn’t have one himself.

Canada has a milk production/marketing system that works fairly well. Dairy farmers enjoy relatively stable prices that let them make a reasonable profit. But the price they pay for this is that their production is strictly limited. They have a system in place that permits them to only produce a specific amount of milk. If they want to expand their operation, the only way they can do it is by acquiring the quota of a different farm that is shrinking or going out of business.

This also means that Canada has to put in place import restrictions that prevent outsiders from dumping their surplus product onto Canadian markets at cut-throat prices and destabilizing their whole system.

This, some claim, is “unfair”. Canada, they claim, should simply allow the US to dump it’s surpluses on the Canadian markets so the US can continue to ramp up milk production to make even more product that no one wants and wrecking the Canadian dairy industry just as badly as we’ve wrecked the US markets.

They want a “free market”. But only a market that’s “free” for them, and not for anyone else, it seems. They want a market where they are free to dump their excess on everyone else, but at the same time they want the US to protect them from other countries doing the same thing to us. Hence all of the rhetoric coming out of DC about tariffs on imports, claims that China and Mexican products are “destabilizing” our markets by dumping cheap products on us.

But we should be able to do it to them?

Could the government here ever develop a marketing system that actually works? Sure it could. But it won’t. It can’t.

The problem is that the government is no longer in the hands of elected leaders who represent us. Instead politicians have sold their souls (and ours) for the almighty dollar. Their actions are being influenced not by the voters who elect them, but by a handful of well financed special interest groups that are largely funded by a tiny handful of wealthy individuals and corporations and which pump hundreds of millions of dollars into election campaigns.

The author of the editorial wants farmers to join up with one marketing board or farmers’ organization or other to try to work with the government to get changes made. It’s highly unlikely that will work. It certainly hasn’t worked in the past. Farmers’ organizations attempting to change the system have come and gone by the dozens, and almost none of them have had any real positive influence on things. In some cases, they’ve made things worse.

What’s the solution? The government isn’t going to be any help. That system is largely broken. The government no longer responds to the needs of the people it’s supposed to represent, but only responds to those who can write out six figure checks or own a high priced and well funded lobbyist in DC.

I wish I had an answer. I don’t.

 

 

Milk Wars

Well, the politicians have gotten involved in the dispute with Canada over their change Screen Shot 2017-04-27 at 6.43.56 AM.pngto their milk import policies, and as you might expect, there has been a lot of muttering, tut-tutting, bloviating and ranting, with absolutely nothing being done about anything. The president got involved, appearing in Wisconsin briefly where he said many, many things to try to make it sound like he was going to do something, and as soon as he got out of the state and safely back in DC, the Whitehouse immediately disavowed everything he said, blunted or even eliminated entirely the vague threats, and we aren’t going to do this or that, but oh, even though the dispute is about milk we’re going to put a tariff on Canadian wood…. Wood? Really? Oh, well…

The state’s ag secretary is apparently actually doing his job, trying to help the dairy farms that are being dumped by Grassland. But in the long run there isn’t a heck of a lot that can be done at the state level. Fortunately it seems like most of the farmers effected by this have now found other markets for their milk, but the situation is still very concerning, and I expect things will get worse before they get better.

Blaming Canada for this, as many are doing, is silly. These new rules should not have blind sided anyone. From what I’ve been reading, the rules have been in the works for at least a full year, if not longer. Back in November already we were seeing stories popping up about the change in rules and warnings of how it would effect the markets here. So the processor’s claim that they were blindsided by this is a bit disingenuous. If their management didn’t see this coming, they really should be in a different business.

The real problem is the dairy industry itself and the politicians who keep fiddling with it, not any specific country. And the problem is world wide, not limited to the US or Canada. The problem is that dairy farms are producing way, way too much milk. More than the market can absorb. And instead of trying to deal with the situation, the reaction of the whole industry is to try desperately to come up with some kind of market for the stuff, any way they can, even if it destabilizes some other country’s farming industry. Pressuring politicians to institute still more ways to artificially prop up prices.

Canada has done something no other country has, it has actually been trying to deal with the problem of oversupply. It has a fairly strict quota system on milk production to try to keep the market stable. But in order to make it work, they have to restrict imports of dairy products from outside of Canada or the whole system would fall apart as the country is flooded with cheap imports. (The EU tried a quota system but abandoned it a year or two ago)

Is this protectionism? Of course it is. But you have a choice: Do you protect your businesses at home, giving them a level playing field to work with, restrict production so the farms can be relatively profitable, or do you open up your markets to cheap imports, often cheap because of government subsidies, tax breaks and other things that make it cheaper for them to produce the product than you can?

Then the politicians get involved… Price supports, tax breaks, grants, subsidies, government agencies buying up surplus product to artificially prop up prices, mandates that you have to use certain products (Wisconsin still has laws that force restaurants and food service operations to serve butter, for example), the list goes on and on. The end result is that anyone who thinks there is a “free market” for dairy products is living in a dream world.

What’s the solution to the problem? I really don’t know. My father used to say that the system was so screwed up that the whole thing should be scrapped. All of it. Make it a true free market. No government subsidies, no tax breaks, no marketing boards. Leave the health and safety regulations, testing, etc. But get rid of everything else. Turn it into a real free market that has to respond to normal supply and demand rather than a government supported mess where farms are propped up by various programs and price manipulations that encourage overproduction.

Would it help? I don’t know. But it seems to be about the only thing we haven’t tried yet. It’s obvious that all of the quota systems, price supports, surplus buys and everything else isn’t doing any good.

Catching Up

Brazil Scandal

I haven’t heard much about the meat scandal going on in Brazil on the main stream media but it’s been all over the ag press since the story first broke. According to reports, Brazil’s meat exporting companies have been involved in bribery scheme where government inspectors and auditors were bribed to permit the companies to ignore sanitary regulations and inspections, falsify medical records and certificates, and ignore tampering with products to disguise problems with the meat. It’s also alleged the producers used ascorbic acid and other chemicals to disguise rotten meat, injected water into meat to inflate the weights. It’s just nasty. The whole story sounds like something straight out of “The Jungle” by Upton Sinclair.

There are now reports of large numbers of arrests as the government tries to do damage control. Brazil is the largest exporter of beef and poultry in the world, and the scandal has decimated the industry. Many countries instituted outright bans on importing Brazilian meat and meat products or instituted much stricter inspection protocols. Things are slowly starting to get back to normal, but the Brazilian meat industry really took a hit on this one and it could take some time for it to recover.

The really scary part about this is that meat processing companies had allegedly been bribing the country’s federal meat inspectors for years before this was discovered.

Does No One Remember?

Does no one remember what things were like before the EPA came along and environmental laws were finally brought on-line? It seems not, judging from the stuff I’ve been hearing coming out of the “new” EPA and the new administration. If you read the laundry list of things the new administration is planning on doing when it comes to the environment, it seems none of them do.

And what’s up with this fixation on coal that this administration has? Pruitt just put on a staged event with coal miners in full gear standing around him to try to spin how the gutting of environmental regulations is going to somehow create massive “economic growth”. All things considered, coal is a very, very minor cog in the energy machine. For many years coal has been becoming increasingly irrelevant in the energy world, and not just for environmental reasons. It’s expensive, dangerous, dirty, inefficient, produces huge amounts of waste material when burned, it’s hard and dangerous to mine, and the coal industry doesn’t really employ all that many people.

When I remember what it was like back in the 1960s, and think that we might be going back to those days of cities being entombed in clouds of toxic smog, rivers that were so polluted they actually caught on fire, where if you fell into a river you’d probably die from poisoning before you drowned, and all just so a few politicians can pose for pictures with a handful of miners from an industry that was starting to fail even before they were born, it makes me wonder what the hell is going on.’

Rather than spending all this time, energy and government money propping up the coal industry allegedly to “protect” the jobs of a few thousand miners as the politicians claim they are doing, wouldn’t it make more sense to invest those resources in training the miners for other types of work, giving different types of businesses incentives to move into those areas, etc?

Canadian Dairy Fights Back

The Canadian dairy industry is pushing back against claims that it and the Canadian government are at fault in Grassland cutting off 75 dairy farms here in the state. As I pointed out previously, the story being pushed out by the company about why it abruptly cut off 75 farms, forcing them to scramble to try to find new processors to buy their milk, seems to be a bit disingenuous. Especially when Grassland is claiming it had to cut off those farms because it can’t sell the milk while the company itself is seeking permits to build it’s own 5,000 cow dairy farm.

The Canadians are pointing out that the real culprit is the US’s overproduction of milk. And they’re right. The market for dairy products is utterly saturated. Despite an increased demand for butter, the US domestic market has been flat for years, with some sectors, such as consumption of liquid milk, actually declining despite heavy marketing and various gimmicks. And while demand is shrinking, prices falling, the diary industry responds by drastically increasing production?

Even one of the farmers dropped by Grassland agrees as is noted in the story linked above.

One of the biggest problems with the whole dairy industry in the US is government intervention in the market. Political manipulation of the market has resulted in a maze of rules, regulations, laws, marketing schemes, surplus buys and I don’t know what all else, that has left us with a marketing system that is convoluted, irrational, and so outdated that parts of it go back 75 or even a hundred years.

There is More on the Dairy Farm Story

I mentioned previously that a short time ago Grassland Dairy Products here in Wisconsin, which makes mostly butter, sent out letters to 75 dairy farmers telling them that as of May 1 Grassland would no longer be buying their milk. This left those farmers in a terrible situation. They now have no place to sell their milk. And the way the market is right now, finding a new processor to sell to is almost impossible.

In it’s press releases and comments to the media Grassland blames Canada. Canada, according to Grassland, changed their dairy import policies almost literally overnight, making it impossible for Grassland to continue to sell almost a million pounds a day of ultra-filtered milk, used in cheese making, to Canada. According to some of the information that came from the company, they received only two days notice before the change was implemented. The company had no choice but to cut back on the amount of milk it purchases. Grassland claims that it cut off those farmers that the company felt would have the best chance of finding a new market for their milk elsewhere.

But some people started to do some digging, and as is often the case, what’s been coming out in the press releases and statements from the company seems to have some problems. I ran into an op-ed piece over at Wisconsin Agriculturist that points out numerous problems with the whole story as it’s being presented by Grassland, and if true, there is a lot more going on here. You can read it here.

First of all, allegedly Grassland was not blind sided by this as they seem to be claiming. This didn’t happen overnight as the press releases seem to claim. This has been in the works by Canada for a long time. Grassland allegedly knew about this back in November already, and may have known as much as two years ago according to the editorial piece. Governor Walker actually wrote a column about it back in November.

Then there is the issue of which farms they cut off. The company claims it picked farms that it believed would best be able to find markets for their milk. But almost all of the farms being cut off are the ones that are the farthest away from the company’s processing facility in Clark County. Cutting off the farms that are the farthest away from their processing center would save the company a small fortune on shipping costs.

There there is this little tidbit: At the same time the company is cutting off 75 dairy farms, it is trying to get the permits to build it’s own 5,000 cow company owned mega-farm.

There’s no doubt that the company lost significant sales of product to Canada, but there seems to be a lot more going on here than just a trade squabble with Canada.

 

Disconnection from Reality in Agriculture

I often find myself irritated by what appears to be a serious problem with how some ag news outlets and their various pundits report on the dairy industry. Ever since milk prices plummeted a couple of years ago, I’ve been reading an endless string of opinion pieces by the so called experts, the pundits, even actual news reports, that indicate that milk production is dropping, or is going to drop, the number of milking cows is going to shrink, and there is going to be a significant improvement in farmgate(1) prices.

Even as I was reading some of those items I was scratching my head because the actual data I was seeing was telling me exactly the opposite of what the pundits at the ag web sites were claiming. While there was some shrinking numbers in some parts of the world, like New Zealand, what I was seeing in the rest of the world was a significant increase in production almost world wide.

The experts were claiming that production in the US was shrinking as well. They were claiming that production was flat or even shrinking as farmers culled herds and halted expansion plans.

The problem was that at the same time I was seeing new permits for mega farms being applied for, news stories about expansion plans, and other indications that exactly the opposite was happening.

The new USDA report that came out yesterday supported what I’d been seeing in the news, and indicated that the pundits don’t read the news reports in their own magazines or websites.

August milk production was up almost 2% in the US. Texas’ production was up 11%. The report said that 16,000 milking cows were added in July alone, and 45,o00 were added over the past year. And just ten minutes ago I was reading about yet another application here in Wisconsin for a dairy CAFO(2) to expand to 5,000 head.

The problem with a lot of these experts seems to be that they look at a specifically local condition and extrapolate from that and apply it world wide, while ignoring what’s really going on.

Some of the claims that production in the US was in decline was due to California. Production there has been declining significantly for the last ten years for a variety of factors. But they’ve been ignoring the fact that almost everywhere else in the US production has been going up. Wisconsin, North Dakota, Arizona, Minnesota… almost every state with any kind of significant dairy farm presence has been increasing production, often dramatically, as with Texas.

It’s been the same thing with the EU. They focus on a single country that’s seen a decline in production, and from that claim production is going down through the entire EU. When it isn’t.

It’s been a similar story when it comes to demand for milk products. They seem to focus on a small part of the world that is experiencing an increase in demand for milk products, and apply that world wide.

Even worse, they’ve gotten in the habit of looking at Global Dairy, a milk marketing system in New Zealand, as an indicator of world wide demand. But they tend to ignore the fact that GD is not an independent market. It is a wholly owned subsidiary of Fonterra, the New Zealand milk processing giant, and that it has a history of deliberately manipulating supplies flowing through the market in order to manipulate prices. Neither the amount of product flowing through GD, nor the prices of the products sold, is an accurate picture of supply and demand.

 

 

  1. Farmgate price is not the commodity futures price, but the actual price that the farmer gets for her/his product. There is often a significant difference between the commodities prices and the farmgate price. For example, a couple of months ago when the corn price on the Chicago market was running about 3.49, the actual price farmers in this area were getting for their corn was 2.78.
  2. CAFO is the term used by government for a mega farm. Concentrated Animal Feeding Operation. It applies not just to dairy farms but to any animal operation that has more than a certain number of cattle, pigs, etc. Generally around 500 – 700 animals.

U.S. Bites Into Cheese Mountain With Stockpile Purchase (1) | Agweb.com

Milk glut has pushed dairy prices to lowest levels since 2009.

Source: U.S. Bites Into Cheese Mountain With Stockpile Purchase (1) | Agweb.com

The buy by USDA will do little to improve farmgate milk prices, and in the long run might actually do more harm than good by temporarily improving wholesale prices and thus encourage even more overproduction.

It has not been a good time to be a dairy farmer almost anywhere in the world over the last year or two. A variety of factors, including wide spread drought one year and China stockpiling milk products led to a dramatic upturn in the farmgate price for milk. And for a time dairy farmers were doing pretty darn good.

Unfortunately, it seems that everyone, including a lot of people who should have known better, seemed to think that this situation was going to continue into the future, that dairy prices would remain high, and that there were massive profits to be made if they expanded production. As a result dairy operations began expanding all over the world. The EU lifted its production restrictions, farmers added cows, processors began building new production facilities. Fonterra, the world’s largest dairy co-op based in New Zealand, was investing heavily in the Chinese dairy industry because it saw massive profits were just waiting.

Well, it couldn’t last. And it didn’t.

China wasn’t buying up milk products because it really needed them. China was buying because it was first of all, getting a really, really good price. It wasn’t using the products it was buying, it was stockpiling them against future price increases. Chinese consumption of imported milk products was also being driven by a series of serious food contamination scares, including the deliberate adulteration of milk by criminals with chemicals that made the milk appear to have higher protein levels in order to get higher prices. The adulteration resulted in hundreds, even thousands of people becoming sick and some even dying. Ventures into marketing milk products in Southeast Asia were failing badly. The Chinese themselves were investing heavily in domestic milk production. China hates being dependent on imported foods for obvious reasons, and has been trying to do something about it. Western style mega-farms were starting to pop up, supported by the government. China was also cleaning house internally, launching extremely strict monitoring of food production to prevent things like the milk adulteration horror. They actually executed people for that crime.

So while China’s imports of milk products was shrinking drastically, world wide demand was flat, production continued to expand.

And milk prices plunged.

My father often said that a lot of farmers were their own worst enemy. Unfortunately he was largely correct.

He was also enormously skeptical of government price support efforts, and he was largely correct there as well. While these government programs like this cheese buy are well intentioned, in the long run they only serve to make the problem worse by temporarily propping up market prices and encouraging over production. Once the program ends, the market ends up being worse than it was before.