Milk Prices: Sigh…

Milk prices, especially the price of skim and whole powdered milk, plummeted at Global Dairy Trade of New Zealand, dropping 12.4% and 15.5% respectively. (Source: Agrimoney.com | New Zealand milk prices follow Europe, US lower)

People were starting to think that milk prices were beginning to stabilize, and that milk prices were finally starting to go up to the point where dairy farmers might not be under such financial stress from low prices.

But that might all have been little more than a house of cards. There were always a lot of problems with those hopes.

The first problem was that except for the New Zealand and Australian producers, milk production in the rest of the world had not really declined all that much, and in large parts of the world like North America, production had actually been increasing. While prices have been going up here in the US, that increase in milk price seems to have been due more to market stabilization and corrections than to anything else. There has been no significant increase in demand for dairy products to push prices up.

The second was that many seem to rely on prices at GDT as some kind of indicator of the overall health of the milk market. They shouldn’t. Global Dairy Trade is owned by Fonterra, the huge milk co-op in New Zealand. It markets it products mostly to Southeast Asia and China. And because it is owned by Fonterra, Fonterra can do whatever it likes with it. Fonterra has deliberately restricted or increased the amount of product flowing through GDT in order to manipulate the market prices in the past.

So relying on a sales organization that serves a rather narrow market, and which is wholly owned by a milk producer, and which has used that sales organization to manipulate market prices in the past… Well, do I really need to tell you that relying on sales figures at GDT as some kind of indicator of market conditions is really not a good thing to do?

 

Agrimoney.com | Revival in US milk prices to continue, says Dean Foods

 

Source: Agrimoney.com | Revival in US milk prices to continue, says Dean Foods

This is one of those situations where I don’t know where they’re getting their information because what they’re saying here isn’t what I’ve been reading in the ag news.

Dean Foods seems to be trying to claim farmgate prices are going to go up significantly, that US dairy exports are robust and growing, and that the markets are giving off “buoyant signals”.

But well, no, the market is doing no such thing, and there seems to be no indication that we’re going to be seeing any kind of significant increase in farmgate prices in the US any time soon.

While milk production in NZ and the EU is trending down a bit, here in North America it has continued to rise significantly, with significant numbers of new cattle being added to milking herds and continued increases in milk production. Texas was up about 11%, Minnesota and Wisconsin were up about 2% or a little less. Overall US production is around +1.2% to +2.3%, depending on the numbers you believe, and there doesn’t seem to be any sign that’s going to stop.

As for cheese, yes, there was a blip in the cheese price last week, but that happens all the time, especially as we get closer to major holidays, and we haven’t even begun to make a dent in the truly massive amounts of cheese and butter already in storage. The USDA’s recent purchase of about $20 million in surplus cheese (if I remember the number right) didn’t even make a dent in the amount of cheese in storage. And as of this morning, cheese prices have already started to fall again, down 6 cents over the weekend.

And the statement that “foreign buyers are lapping up” US dairy products is, aside from being a horrible pun, simply not true. Exports of dairy products actually dropped 2% in September.

There is always an uptick in prices this time of year as we approach the holiday baking season. Cream, cheese and butter prices almost always begin to rise around this time of year as retailers and suppliers try to cash in on increased demand. It’s a seasonal blip that doesn’t really indicate any kind of significant improvement in the market.

Maybe Dean foods is just trying to make investors feel a bit better about the fact that Dean’s profits fell by 28% last quarter?

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.