Dick Groves
Editor, Cheese Reporter

 

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The Dairy Industry’s Plant-Based And Animal-Free Threats

It certainly is a great time to be in the dairy industry. Production and consumption continue to set new records, exports are doing quite well, milkfat has made an unbelievable comeback in the eyes of both consumers and at least some nutrition experts, etc.

Or not. It’s also a perilous time to be in the dairy industry, judging by some of the observations made by a few speakers at this week’s annual ADPI/ABI joint annual conference in Chicago. And that was just during the two Monday morning sessions.

Most notably, several speakers mentioned the rise in veganism in general and the proliferation of imitation (plant-based) dairy products specifically.
This is an area that is already having a negative impact on at least some sectors of the dairy industry, and it will probably get worse in the future.
Beth Briczinski of ABI and National Milk Producers Federation noted that imitation dairy beverages have changed considerably over the years. Back in the 1980s, the vast majority of “soymilk” was used for infant formula.

That product bore little resemblance to today’s “soymilk” products, Briczinski pointed out. It was sold in “Oriental” grocery stores or in “niche” health food markets. It was also in aseptic, shelf-stable packaging and sold in the center aisles in grocery stores. The product itself was “dark brown in color” and had a “beany off-flavor.”

That changed in 1996, when Silk began marketing its products. That’s the year it moved into the refrigerated dairy case, and that’s really what set things in motion for all the imitation dairy products we see today, Briczinski explained.

How big a threat are these products to the dairy industry? That’s difficult if not impossible to predict. Just in the fluid milk sector, it’s worth keeping in mind that sales have been flat to declining for a number of years now, so all the new “milks” made from everything from soy and almonds to rice and hemp can’t be blamed entirely for fluid milk’s problems.

But the decline in fluid milk sales has accelerated in recent years, dropping from 52.3 billion pounds in 2013 to 49.7 billion pounds in 2016 (the most recent years for which figures are available from USDA’s Economic Research Service).

During that time, and since then, we’ve read and heard that several new “milks” are going to be the Next Big Thing; these “milks” are made from such things as peas and oats. And all of these new products appear to be chipping away at milk sales, not to mention stealing space in the dairy case.

Frustratingly, these products are not only a sales threat, they also threaten dairy’s good nutrition “halo.” They use dairy terms, “milk” being the most obvious, but they fail to deliver milk’s nutrition package, starting with protein, which is lacking in most of these new “milks.”

For example, Silk Almondmilk has exactly one gram of protein per eight-ounce serving, compared to eight grams of protein in a similar serving of cow’s milk.

These new products aren’t just confined to “milks.” Check out the dairy case in a typical supermarket and you might find “Greek Yogurt” Alternative from Daiya Foods (ingredients in the plain version include Coconut Cream, Pea Protein Isolate, Creamed Coconut, Potato Protein, and over a dozen others) or Vegan Mozz from Miyoko’s (ingredients include organic coconut oil, organic cashews and organic tapioca).

Along these same lines, Briczinski was one of several speakers who specifically mentioned Perfect Day, the company that’s on a mission to “create a world of delicious animal-free dairy products.”

In addition to going after dairy’s markets, many of these products have something else in common: financial backing. Perfect Day, for example, announced back in late February that it has raised $24.7 million in funding, which the company said underscores that industry leaders and top global investors share their vision for “creating a future-proof source of nutrition and dairy delight for everyone in the world.”

Meanwhile, the Plant Based Foods Association late last year launched a new membership opportunity for investment firms supporting this food industry sector, with 10 investment firms having signed on as founding members. Oh, and the PBFA recently welcomed its 100th member, Blue Diamond Growers, the world’s leading almond marketer and processor. PBFA itself was founded in March of 2016 with exactly 18 founding members.

So how does the dairy industry fight these plant-based and animal-free products? There are at least a couple of approaches that were suggested by Briczinski and her NMPF colleague, Chris Galen.

First, the dairy industry needs to continue to hammer away at the nutritional inferiority of these products, and continue touting the nutritional superiority of dairy products. For example, NMPF’s “Dairy Imitators: Exposed” aims to unmask imitations of real nutritious dairy foods by comparing products such as Kite Hill’s Artisan Almond Milk Yogurt to real vanilla yogurt.

And speaking of real, NMPF also licenses use of the REAL Seal, which can be used by dairy product manufacturers, food processors, retailers, and food service operations to help differentiate their products from imitations.

The other thing needed in this battle is some regulatory enforcement. NMPF has been pushing FDA, as well as Congress, to enforce the labeling laws that already exist, and this is definitely needed now more than ever.
If you don’t believe that, check out the Plant Protein Milk being marketed by Bolthouse Farms; you have to look pretty hard to see “non-dairy” on the principal display panel.

Cheese Industry Attracting Some Impressive Technology

One thing about producing over 12 billion pounds of something: it seems to attract quite a bit of research, development and new technology to an industry. Such is the case for cheese and related industries, and the record-setting International Cheese Technology Expo last week in Milwaukee, WI.

It’s difficult if not impossible to sum up how impressive the ICTE was, not only in size (more than 300 companies exhibited at the record-breaking show), but also in scope (exhibits covered everything from air or water treatment to whey processing equipment).

Such is life in an industry that has now topped 12 billion pounds of production for two consecutive years, including a record 12.659 billion pounds in 2017, according to figures released Thursday by USDA’s National Agricultural Statistics Service.

Not only that, but the cheese industry in 2017 also produced, among other things, 484 million pounds of whey protein concentrate, 1.1 billion pounds of lactose, 1.0 billion pounds of dry whey, and 117 million pounds of whey protein isolates.

To put this year’s ICTE in a bit of historical perspective, we went back to 1980, when the Wisconsin Cheese Makers Association (which hosts the ICTE in partnership with the Wisconsin Center for Dairy Research) held its annual convention in La Crosse, WI. According to a front-page story in this newspaper back on Nov. 7, 1980 (the WCMA held its annual convention in the fall back then), “this year’s new Biennial Trade Show opened with about 100 booths of equipment, services and supplies, in the brand new La Crosse Center Exhibition Hall, completed in just the past few weeks.”

If nothing else, the La Crosse location of that 1980 show should help put things in perspective. The Wisconsin Cheese Industry Conference, co-hosted by the WCMA and CDR and held in odd-numbered years (the ICTE is held in even-numbered years), was last held in La Crosse in 2013; the event basically outgrew the city and the convention center, and has been held in Madison since 2015 (with the ICTE having grown to the point that only Milwaukee can host it).

So what was the industry like back in 1980? For one thing, cheese production that year totaled just under 4 billion pounds. Interesting; over the past 38 years, both cheese production and the WCMA’s biennial full-size trade show have roughly tripled in size.

But the cheese industry has diversified a bit since then, to put it mildly. Cheddar production back in 1980 totaled around 1.75 billion pounds, or about 44 percent of total US cheese output. Last year, Cheddar production totaled around 3.7 billion pounds, and accounted for under 30 percent of US cheese output.

Meanwhile, the state of Wisconsin started tracking specialty cheese production in 1993 (another change since 1980), and since then, production of these cheeses — which range from Asiago to Yogurt cheese — has grown from 83.1 million pounds to 773.7 million pounds (as of 2016, the most recent year for which production figures are available).

Also back in 1980, dry whey production totaled 691 million pounds, while lactose output was around 140 million pounds. Whey protein concentrate and whey protein isolate? They were not yet reported by NASS (NASS statistics on WPC production date back to 1983, while WPI production figures date back to 2003).

That brings us back to 2018, and all the amazing technology on display at last week’s ICTE. Keep in mind that today’s cheese industry doesn’t just produce 12.659 billion pounds of cheese every year in bulk sizes ranging from 640-pound blocks and 500-pound barrels to individual strands of String cheese — it also reduces that cheese to make it more user-friendly, by shredding it, slicing it, dicing it, or grating it, among other things.

The cheese industry is also a heck of a lot more regulated today than it was back in 1980, thanks in part to the Food Safety Modernization Act but also due at least in part to the fact that the US now exports more than twice as much cheese (750 million pounds in 2017) as it sold to the government under the dairy price support program back in 1980 (350 million pounds), meaning it not only has to satisfy US regulators but it also has to satisfy regulators in close to 100 other countries.

Yet another factor propelling growth in the amount of technology being attracted to the cheese and dairy industries concerns the employment situation. Back in 1980, the oldest Baby Boomers were in their mid-30s and the youngest were still in high school. Today, Baby Boomers are retiring, while Millennials (especially the youngest of the Millennials) are proving to not always be reliable employees.

So we’ve gone from a situation in 1980 where unemployment was relatively high and there were more than enough employees to fill available positions to a situation in 2018 where pretty much everybody is looking for more reliable help and robots are becoming more important everywhere from the dairy farm to the cheese plant to the warehouse.
And these aren’t exactly your vintage “Lost in Space” robots (we’re referring to the 1960s TV series, which featured a rather primitive robot that bears little resemblance to today’s astonishingly skilled robots).

This year’s record-breaking International Cheese Technology Expo served as a great reminder of how much the cheese industry has progressed and grown over the past four decades.

It also helped serve notice that the industry is attracting the kind of R&D, technology and talent to continue propelling growth for many years to come.

 

Some Good, Lots Of Bad In Food Labeling Bills

Legislation recently introduced in both the US House and Senate would impact food labels in several ways. The bills appear to contain more negatives than positives, which is why it’s a good thing they’ll go nowhere this year.

As reported on our front page last week, the Food Labeling Modernization Act was introduced by three Democrats in the Senate and three Democrats in the House. That alone spells doom for this legislation, since Democrats have almost zero clout in either chamber and Republicans don’t exactly appear to be lining up to support this measure. It’s worth noting that similar legislation was introduced by Democrats in both 2015 and in 2013, and went nowhere.

It’s also worth remembering that this is an election year, and Congress isn’t expected to get a whole lot accomplished between now and Nov. 6. It’s a safe bet that “modernizing” food labels isn’t going to be a very high priority for Congress for the next several months.

That said, there’s at least a possibility that this legislation could gain some traction sometime in the not-too-distant future if Democrats regain control of the House and/or the Senate in this fall’s election. And that wouldn’t be all that good for the food industry in general or the dairy industry in particular.

For starters, the centerpiece of this legislation is the establishment of a “single, simple, standard” front-of-package labeling system that would display calorie information along with information related to the content of saturated and trans fats, sodium, added sugars, and any other nutrients that FDA determines are “strongly associated with public health concerns.”

This system would have to employ an approach that “clearly distinguishes” between products of greater or lesser nutritional value, and may include a warning symbol or symbols for products high in saturated or trans fats, sodium, added sugars, or other nutrients the consumption of which should be limited or discouraged; or a stop-light, points, star, or other signaling system to rank foods according to their overall health value.

We roundly criticized front-of-package labeling in this space just a few weeks ago (please see Front-Of-Package Labeling Isn’t The Answer To Anything, in our Mar. 30th issue), so we won’t repeat our earlier criticisms of this idea, except for the legislation’s mention of a “star.”

Such a system already exists: the Guiding Stars® program, a point-based system that awards credit points to products for nutrients to encourage and assigns debit points for nutrients to limit. The net score of a product is then translated into a Guiding Starts rating of 0, 1, 2, or 3. Only foods with a score above 0, indicating that the positive nutrient contribution outweighs the negative nutrition contribution, receive stars.

“Debits” include saturated fat and sodium, so guess how cheese fares in this system? A random check of Cheddar and Parmesan cheeses finds that these products are awarded no stars. Apparently nutrient density doesn’t matter in this particular system, and might not matter in a system mandated by FDA either.

The legislation also includes requirements for the format of ingredient information on food labels. This would include requirements for upper- and lower-case characters, serif and noncondensed font types, high-contrast between text and background, and bullet points between adjacent ingredients.

These proposed changes are intended to improve readability and assist consumers in maintaining healthy dietary practices.

Well, ingredient statements have been required for years, but consumers still choose to eat Hostess Twinkies, just to name one product with a relatively long ingredient list. This is just going to create more headaches, and costs, for food companies.

On top of that, the FLMA would require food manufacturers and importers to submit to the agency all information to be included in the label, including the Nutrition Facts panel, a list of ingredients, an image of the primary display panel, and other information. Again, this would appear to add costs for food companies with no benefit for consumers.

There is one somewhat intriguing section of the FLMA, and that is the section that deals with the use of a couple of specific terms. Not later than two years after the FLMA is signed into law, FDA would have to promulgate a final rule relating to use of the term “natural” on food labels.

It may be recalled that FDA, back in November 2015, asked for input on the use of the term “natural” on food labels. Apparently there’s some interest in this, given that the agency received over 7,500 comments from the public.

In its request for comments, FDA explained that it had been petitioned by the Grocery Manufacturers Association to issue a regulation authorizing statements such as “natural” on foods that are or contain foods derived from biotechnology; that it had been petitioned by Consumers Union to prohibit the use of the term “natural” on food labels altogether; and that it had been petitioned by The Sugar Association to define the term “natural.”

Since the comment deadline ended, FDA doesn’t appear to have done anything. Meanwhile, bipartisan legislation introduced in both the House and Senate earlier this year (the “Codifying Useful Regulatory Definitions Act,” or “CURD Act”) would define the term “natural cheese.”

Maybe some future version of the Food Labeling Modernization Act could require FDA to not only define the term “natural,” but also to define the term “natural cheese.” The CURD Act already enjoys bipartisan support, unlike the FLMA itself.

 

Extending Multiple Component Pricing Makes Sense, And Cents

Last week, 14 dairy cooperative associations, along with several state and national dairy producer trade associations, asked the US Department of Agriculture to hold a hearing to consider adoption of uniform multiple component pricing plans for the Southeast and Appalachian federal milk marketing order markets, along with adjustment for somatic cell count.
This proposal makes sense for today’s dairy industry, and it also will make cents for the industry.

As noted in last week’s front-page story on this proposal, MCP has been used in the federal order program for 29 years, and is also employed in California, Canada, the European Union and other countries. The federal order reform final decision, released 19 years ago this month, provided a uniform, protein-based MCP plan for all seven markets outside of the southeast and Arizona (that is, outside of the Southeast, Appalachian, Florida and Arizona-Las Vegas federal orders).

Since federal order reform went into effect on Jan. 1, 2000, things have changed a bit in the dairy industry, to put it mildly. As the MCP proposal notes, the Southeast and Appalachian markets in the 1990s had high Class I use and were largely supplied by milk originating in or near the markets.

But milk production within that southeast region has declined since order reforms went into effect, the proposal points out. Specifically, milk output in the 10 states that largely comprise the Southeast and Appalachian orders fell by 18 percent from 2000-05, another 12 percent from 2006-11 and 1 percent from 2012-16. Of those 10 states, only Georgia posted a milk production increase over the 2000-16 period.

Today, the southeast region relies on milk supplies from dairy producers who have access to MCP markets, the proposal explains. Milk originating in MCP markets would “rationally” be reluctant to supply fluid milk needs in the southeast if that meant giving up greater revenue from MCP in the market of origin. A high component producer within or near the southeast market would rationally seek an MCP market buyer, rather than serve southeast fluid needs, to enhance farm revenue from the payment for protein.

The proposal illustrated half a dozen examples of the “costly marketing inefficiencies” due to the adjoining MCP and skim-butterfat markets. For example, high protein milk in or near the southeast markets is transported away from the southeast to MCP market plants, while lower protein milk from more distant sources is shipped to the southeast for fluid use, adding unnecessary transportation costs on the outbound as well as on the inbound milk as tanker trucks pass each other going in opposite directions.

Interesting. In recent years, the US dairy industry has committed considerable resources to becoming more sustainable, yet we still have situations where, as the MCP proposal explains, milk marketing and movement in the southeast is being directed by the unequal regulated pricing systems in adjacent federal orders rather than serving market needs and promoting “marketing efficiencies.”

Put bluntly, if the US dairy industry is truly interested in becoming as sustainable as possible, it will embrace this proposal to extend multiple component pricing to the Southeast and Appalachian orders just to reduce milk marketing inefficiencies. This is just common sense.

It also makes “cents” to embrace this MCP proposal. As the above example notes, transporting high protein milk out of the southeast markets and lower protein milk into the southeast markets adds “unnecessary transportation costs,” both for the outbound as well as the inbound milk.

But that’s just one of several indirect mentions of economics in the MCP proposal.

Here’s another example from the proposal: “Fluid milk suppliers to the southeast markets must bear extra costs from transportation, component content, and source of supply when procuring milk for fluid use.”

And then there’s this: The proposal is expected to benefit producers by “reducing costs associated with supplying fluid markets in the southeast, and enhance average regulated revenue to producers under an MCP plan.” And some producers with lower than average protein will experience less regulated revenue, while other producers experience more. “The cross-subsidy to low protein producers by high protein producers will end.” Sounds fair to us.

Finally, “it is expected that adoption of an MCP plan for the two southeast markets will decrease costs to handlers and cooperatives supplying the southeast fluid milk market and possibly increase costs to manufacturing plants (if any) that do not now pay for the value of skim milk solids used in manufacturing.”

The proposal also points out that average protein in producer milk in MCP markets has increased following adoption of an MCP plan, while somatic cell count levels have dropped “significantly.” A similar response can logically be expected from southeast producers who do not have prior experience with MCP or SCC adjustments.

So from an orderly marketing standpoint, extending multiple component pricing to the Southeast and Appalachian federal orders would appear to make a great deal of sense. And from an economic standpoint, extending MCP to those two orders will benefit southeast region pool producers based on the enhanced market value of skim solids over the value of skim milk under the current pricing system.

Extending MCP to the southeast region is an idea with little or no downside. This proposal should go forward ASAP.

The Significance Of A California Federal Order

With USDA’s release last Friday of its final decision to establish a federal milk marketing order encompassing the entire state of California, the US dairy industry moved one giant step closer to a California federal order becoming a reality. And the significance of this is starting to sink in.
California dairy producers could begin voting Monday on whether they favor a new federal order for the state; the referendum runs through May 5, 2018.

The result of the referendum may well be a foregone conclusion; the California federal order would become effective if approved by two-thirds of the voting producers, or by producers of two-thirds of the milk represented in the voting process.

In may be recalled that the three dairy cooperatives that petitioned USDA to call a hearing to promulgate a California federal order — California Dairies, Inc., Dairy Farmers of America and Land O’Lakes — represent over 75 percent of the milk produced in California (or at least they did when they submitted their petition to USDA back in February 2015).

Co-ops can elect to bloc vote in this referendum, so if CDI, DFA and LOL all decide to bloc vote in favor, the referendum will pass with flying colors.
So how significant will this new California federal order be? Here’s a sentence from USDA’s final decision that puts it in some historical perspective: “While in recent history FMMOs have been consolidated, amended and expanded, it has been decades since a new order has been promulgated.”

Indeed, USDA statistics indicate that the number of federal orders in the US peaked back in 1962, at 83. And the last time USDA actually promulgated a new federal order was back in 1990 (the proceeding took place in 1989 and 1990), when the new Carolina federal order (encompassing all the territory in North Carolina and South Carolina) was established.

By the time federal order reforms went into effect, there were 31 orders, which were consolidated down to 11 (including the aforementioned Carolina order, which is now part of the Appalachian order). The Western order was terminated in 2004, so there have been just 10 federal orders for almost a decade and a half.

And now the California federal order will bump the total back up to 11.
Another area in which the California federal order will have great significance is the amount of milk pooled under federal orders. In 2017, 135.5 billion pounds of milk was received from federally pooled producers, which represented about 62.9 percent of total US milk production.

Add in California’s 2017 milk production of 39.8 billion pounds, and there would have been 175.3 billion pounds of milk pooled on federal orders last year, or 81.4 percent of US milk production. That would appear to be the highest percentage ever; according to USDA’s annual “Measures of Growth in Federal Milk Orders” report, the highest percentage of all milk sold under federal orders was 76, back in 2002. So the addition of California’s milk production to the federal order system is pretty significant.

Class utilization is another area in which a California federal order will have great significance. Last year, Class I utilization was about 30 percent, while in California, Class 1 utilization was 12.8 percent. Obviously, the federal order Class I utilization percentage will take a big drop once the California federal order takes effect.

Meanwhile, federal order Class IV utilization last year was around 15 percent, while California’s Class 4a utilization was 32.5 percent. So in this case, the Class IV utilization percentage will increase pretty significantly once the California federal order takes effect.

Arguably the most significant aspect of a California federal order is the impact it will have on the rest of the US. This is also an area where there is a significant level of uncertainty.

For example, in USDA’s “Regulatory Economic Impact Analysis” of its final decision, the agency noted that the pooling provisions in the proposed California federal order are similar to those in the Upper Midwest federal order which, like California, has a high share of manufacturing milk. In the proposed California federal order, the pooling decision lies with the handlers, which is a “significant change,” since under the current California State Order, nearly all milk must be pooled.

Since no California data are available to estimate the volume of milk that handlers would elect to pool, a separate pooling analysis was conducted to estimate monthly volumes of milk-not-pooled using data from the
Upper Midwest order. This milk pooling analysis found that manufacturers in the Upper Midwest chose to pool less Class II, III, or IV milk when the respective price was high relative to the uniform price. That is, handlers collectively elect to pool less milk when their pool draw is lower and they elect to pool more milk when their pool draw is higher.

For the proposed California FMMO, milk pooled annually in Classes II, III and IV decreases by an average of 1.100, 9.274, and 6.291 billion pounds, respectively, USDA said. The declines in these class utilizations largely reflect milk produced and processed in California that, under the proposed California FMMO, would no longer be pooled.

Finally, a new California federal order will mark the end of an era in the state of California, for dairy producers, processors and everyone else involved in the state’s dairy industry. California’s state milk order has been around for decades, but it will soon be relegated to the scrap heap of dairy policy history.

A new California federal order will be significant, indeed.

Front-Of-Package Labeling Isn’t The Answer To Anything

The idea of front-of-package nutrition labeling has been around for quite a few years now, and is actually gaining momentum in at least a couple of countries. But front-of-package nutrition labeling won’t do what its supporters claim it will do, and will probably harm dairy consumption along the way.

It’s been more than a decade since the Center for Science in the Public Interest petitioned the US Food and Drug Administration to create a front-of-package labeling system. At this point, that petition hasn’t gone very far, if anywhere.

Meanwhile, just last week, Dr. Peter G. Lurie, CSPI’s president, criticized President Trump’s trade negotiators for using the North American Free Trade Agreement modernization talks “as an excuse to pour cold water on front-of-package labeling.” According to Lurie, the New York Times has “convincingly demonstrated” that the US Trade Representative’s hostility to front-of-package labeling “has already had a chilling effect throughout the Americas.”

That’s a good thing, actually, for several reasons. As Lurie points out, NAFTA member Canada is currently developing its own front-of-package nutrition labeling system. As we reported back in our Feb. 16th issue, Health Canada is accepting comments on the front-of-package nutrition labeling through Apr. 26, 2018.

What that agency is proposing is a new symbol on food; the symbol would provide a visual cue that a food is high in nutrients of public health concern, such as saturated fat, sodium or sugars. Not surprisingly, the proposal drew criticism from both the Dairy Processors Association of Canada and from Dairy Farmers of Canada.

There are at least two major problems with front-of-package nutrition labeling, and those two problems are closely related. First, as FDA noted in industry guidance released in 2009, the agency’s own research has found that with front-of-package labeling, consumers are less likely to check the Nutrition Facts label on the information panel of foods. And no matter what type of information would be required in any front-of-package labeling, it wouldn’t be as detailed as the information in that Nutrition Facts label.

Second, the Nutrition Facts label itself is a flawed, if not failed, piece of information. It emphasizes nutrients to avoid, such as saturated fat, dietary cholesterol and sodium, while ignoring or downplaying nutrients that actually provide health benefits, such as protein (which is listed below the aforementioned saturated fat, cholesterol and sodium), phosphorus and magnesium (neither of which is mandatory; both are provided by dairy products).

CSPI and many other health groups are big fans of the Nutrition Facts label. Last November, some 20 public health and consumer groups called on FDA not to delay the updates to the Nutrition Facts labels.

Those updates included, among other things, putting the calorie content of foods in larger and bolder type, putting serving size and servings per container in larger and/or bolder type, using updated Daily Values for nutrients, listing added sugars, and requiring the listing of Vitamin D and potassium.

Among the groups urging FDA to maintain the original timeline for requiring updates to the Nutrition Facts label was the American Heart Association, which said the rise in obesity rates and the prevalence of heart disease, stroke, diabetes, and cancer “underscore the need to provide consumers with up-to-date and easy to understand nutrition information as soon as possible.”
Keep in mind that obesity rates and the prevalence of type 2 diabetes have actually increased since the Nutrition Facts label became mandatory on most food packages back in the mid-1990s. So are we really to believe that the changes being made to the Nutrition Facts panel will help reverse those trends?

FDA wisely decided to drop the “Calories from Fat” line from the Nutrition Facts label because, as FDA points out, research shows the type of fat consumed is more important than the amount. FDA now requires the listing of total fat, saturated fat and trans fat (which wasn’t required until about a decade or so ago), but it doesn’t seem like the science is anywhere near settled when it comes to dietary fat in general or saturated fat specifically.

As noted earlier, 20-plus years of emphasizing fat on the Nutrition Facts label has resulted in higher levels of obesity and type 2 diabetes, so why would anyone think putting some sort of “high in fat” warning on the front of food packages will provide any public health benefit?
Indeed, if anything, the science regarding dietary fats is far less “settled” than it was when the Nutrition Labeling and Education Act (which mandated nutrition labeling on most packaged food) was passed by Congress back in 1990. Today, numerous studies and books, including Nina Tiecholz’s highly regarded bestseller, The Big Fat Surprise, have cast doubts on all the anti-fat rhetoric of the past 60-plus years.

Related to that point, while organizations like CSPI have been waging war on sodium for decades, the science on sodium and its health impacts is also far from settled. Several studies have found that low sodium consumption can be just as harmful as high sodium consumption, so why should high-sodium foods carry a front-of-package warning?

The science is far from settled on the nutritional importance of the current Nutrition Facts label. So health experts should fix what’s on the back of food labels (and make meaningful adjustments to what’s required) before putting warnings on the front of food packages.

 

TheUS Dairy Exports And Global Export Prices

By pretty much any measure, US dairy exports in recent years have grown impressively in both value and in volume terms. For example, dairy exports grew from under $1 billion in 2000 to a record $7.1 billion in 2014, and have been over $5 billion in five of the last six years (2016 was the exception; exports that year were valued at $4.7 billion). And US cheese exports have risen from under 100 million pounds in 1999 to over 600 million pounds in each of the last five years, including a record 810 million pounds in 2014.

Dairy exports have become such a “fixture” in the US dairy business that they’re almost taken a bit for granted, but every once in a while we read something that reminds us of just how much things have changed on the dairy export front over the last few decades.

That “something” was the following sentence in the March Livestock, Dairy, and Poultry Outlook, which was released last week by USDA’s Economic Research Service: “It appears that US domestic prices have been competitive with foreign export prices.”

Indeed, it appears that US prices are a bit below Oceania and Western European export prices for dairy products such as cheese, butter, skim milk powder and dry whey, according to figures cited in the ERS report.
For example, in February, the Oceania export price for Cheddar cheese was $1.69 a pound, while the CME 40-pound Cheddar block price in February averaged $1.5157 per pound.

So how much have things changed over the years in the dairy industry, from a US-vs.-the-world price perspective? Coincidentally, it was 36 years ago this week that USDA held a “Dairy Economics Symposium” in Kansas City, MO, on the situation facing the US dairy industry at that time; specifically, milk supplies were in excess of demand, which had led to substantial government purchases of surplus dairy products to support the price of milk.

The purpose of that 1982 symposium, USDA explained at the time, was to provide the dairy industry with an opportunity to provide input to the agency regarding alternative courses of action that might be taken to work out of the current excess supply situation. Total symposium attendance was 250 people, with 50 presenting their views.

A couple of things from that symposium help illustrate how much things have changed in the dairy business, at least export-wise, since 1982. For one thing, of the 250 people in attendance at that gathering, there were exactly zero from foreign countries. There were attendees from all around the US, but none from outside the US.

Compare that to attendance at, for example, the annual ADPI/ABI meeting, which draws attendees not only from around the US but also from countries ranging from New Zealand and Australia to China and Japan.
That’s how “worldly” the US dairy industry has become in recent years.

The other thing that stands out from that 1982 symposium is how little attention was paid to dairy exports. Bryant Wadsworth, with USDA’s Foreign Agricultural Service, offered the following assessment of export prospects for US dairy products in 1982: “To export significant quantities of US dairy products would require a subsidy since world market prices are much lower than ours.”

To be sure, it was a very different world market back then. Among other things, the European Community (as the European Union was known back then, when there were far fewer member countries than there are today) was spending over $4 billion a year to support its dairy industry, including around $2 billion annually in export “restitutions” (subsidies), Wadsworth explained.

Also, the US ran a healthy dairy trade deficit back then. Just to cite one example mentioned by Wadsworth: the US in 1981 had imported 248 million pounds of cheese, while exporting all of about 13 million pounds of cheese. And a fair amount of those US cheese imports were subsidized by the EC.

After that 1982 symposium, the US itself started subsidizing dairy exports. More specifically, the Dairy Export Incentive Program was initially authorized under the 1985 farm bill, and was utilized to varying degrees to export surplus US dairy products until it was terminated by the 2014 farm bill.

This brief history brings us back to the earlier point made by ERS, that domestic dairy prices are competitive with foreign export prices. And that brings up an interesting question: In this current period of depressed US farm milk prices, is it really in the best interest of dairy farmers for US dairy prices to be at or below world prices?

At first blush, it would appear that the answer to that question is no. That’s just simple math; if, for example, the US cheese price was 10 cents a pound higher, the federal order Class III price would be roughly a dollar per hundredweight higher.

But it’s not quite that simple. If US cheese prices were 10 cents a pound higher, the US would be at least somewhat less competitive on the international market. So, for example, instead of exporting almost 60 million pounds of cheese in January at “competitive” prices, the US would maybe have exported 50 million pounds at less-competitive prices. That in turn would have likely delayed any recovery in US cheese and milk prices (which don’t appear on the verge of recovering anytime soon).

Unlike back in 1982, there is no dairy price support program to buy up unlimited surpluses of US dairy products. Products either get consumed domestically, get exported, or go into warehouses.

With US prices at or below international prices, the US is able to export a pretty healthy volume of dairy products, keeping prices from dropping even further.

 

The Dairy Industry’s New Cash Market

The US dairy industry entered a new pricing era this week with the launch of a new cash (spot) market for dry whey at the CME (Chicago Mercantile Exchange). It will be interesting to see how this new cash market fares in the months and years ahead.

To put this in a bit of historical perspective, it’s been almost 20 years since the dairy industry welcomed its last new cash market. Specifically, the CME began trading a dairy spot market in nonfat dry milk back on Sept. 1, 1998.

It may be recalled that it was also on Sept. 1, 1998, that the CME shifted from weekly to daily trading for its cash cheese and butter markets. Prior to that date, the cash cheese and butter markets had traded weekly.

It may also be recalled that the late 1990s was a period of considerable volatility for the dairy industry’s cash markets. The cheese industry’s longtime cash market, the National Cheese Exchange, closed in 1997 and the industry’s cash market moved to the CME. Less than a year and half later, cash market trading shifted from weekly to daily and the new NDM market was added.

There are also a couple of other noteworthy dates to remember when it comes to dry whey prices. First, it was back in November of 1998 when the CME initially launched cash-settled dry whey (and nonfat dry milk) futures and options contracts. Those contracts were delisted in December 2001 due to inactivity, then relaunched in March 2007.

And second, dry whey prices have been used in the federal milk marketing order program’s Class III price formula since 2000, when federal order reforms were implemented.

So what are the prospects for this new CME cash market for dry whey? There are at least a couple of things to keep in mind when assessing dry whey’s prospects.

The first is the overall size of the market. From a production standpoint, US production of dry whey last year totaled 1.034 billion pounds, up 8.3 percent from 2016 and the first time the US produced more than a billion pounds of dry whey since 2011.

By comparison to the CME’s other cash markets, US production of Cheddar cheese last year totaled about 3.6 billion pounds, while butter production was 1.84 billion pounds and nonfat dry milk output was slightly above 1.8 billion pounds.

But the CME cash markets also have age limits on what can be traded. On the date of sale, cheese cannot be less than four days nor more than one month (30 calendar days) of age, which implies a market size of around 300 million pounds at any given time (that’s average monthly Cheddar production, roughly).

For butter, to be eligible for sale on or after March 1 of a given year, the butter can’t have been produced or stored prior to December 1 of the previous year, implying a market size of maybe 500 million pounds at its smallest (this is, roughly, butter production in December, January and February). Nonfat dry milk has to be less than 180 days old, implying a market size of about 900 million pounds at any given time.

And for the new dry whey market, on the day of sale, the dry whey has to be less than 120 days old, which implies a market size of maybe 350 million pounds at any given time (that’s roughly four months of dry whey production).

One additional way to assess the potential size of this cash market is to look at the National Dairy Products Sales Report released weekly by USDA’s Ag Marketing Service. This program consists of 101 reporting entities selling 1 million pounds or more of dairy products; there are 17 plants reporting 40-pound Cheddar blocks, 13 plants reporting 500-pound barrels, 22 plants reporting butter, 31 plants reporting NDM and 18 plants reporting dry whey.

Weekly sales volumes for that report, during a recent period, ranged from around 11 to 12 million pounds of Cheddar blocks, 11 to 13 million pounds of barrels, 5 to 7 million pounds of butter, 17 to 25 million pounds of nonfat dry milk and 5.7 to 10.5 million pounds of dry whey.

So the new cash market for dry whey is perhaps a bit “thinner” than some other cash dairy product markets, but not by much. And the cash market for cheese has been characterized as “thin” since at least the late 1970s, when monthly Cheddar production was between roughly 100 million and 150 million pounds.

One other interesting point to remember about the current CME cash markets: the nonfat dry milk market was pretty inactive for a number of years, until activity started to increase just in the past several years. The NDM cash market started out with a fair amount of activity; there were half a dozen price changes for both grades of NDM that were traded at that time just during the first month of trading (September 1998).

But there were also long periods with no trading activity at all on NDM, or at least no price changes. Just to cite one example: the Grade A NDM price rose to 98.25 cents a pound on Mar. 30, 2005, and remained at that price until Oct. 24, 2005, when it rose 1.25 cents to 99.5 cents a pound and remained there until January 2006. This was reminiscent of some years at the old NCE in the 1980s.

Dry whey got off to a relatively active start this week, with unfilled bids for 5 cars and uncovered offers of 2 cars just on the opening day of trading. One car of dry whey was sold this week (today).

Given the dynamics of the dry whey business (the size of production, the global nature of dry whey markets), our guess is that there will be at least a fair amount of activity on the dairy industry’s newest cash market for the foreseeable future.

 

Disappearance Statistics Illustrate Importance Of Exports

Let’s face it, the US dairy industry has certainly seen better years than 2017 when it comes to domestic disappearance of dairy products.

Fortunately, it’s seen very few years that have been better when it comes to exports — and also very few years that better illustrate the importance of dairy exports to the growing US dairy industry.

As reported on our front page last week, domestic use of dairy products declined for all of the dairy products tracked by USDA’s Economic Research Service except for American-type cheese, butter, and lactose.

The flip side of that is that domestic disappearance declined for other-than-American-type cheese, nonfat dry milk/skim milk powder, dry whey and whey protein concentrate (these are the other dairy products tracked by ERS).

Also according to ERS, domestic use last year increased only 0.3 percent from 2016 on a milkfat basis, but dropped 0.7 percent on a skim-solids basis.

So how did the dairy industry cope with these relatively poor domestic disappearance statistics coupled with an extra 3 billion pounds of milk (that’s how much milk production in 2017 increased over 2016)?
Exports. US dairy exports didn’t turn negative total disappearance figures positive in all instances, but it did turn at least some of them positive, and it helped improve the others.

For example, domestic commercial disappearance of other-than-American cheese last year totaled 7.179 billion pounds, down 0.1 percent, or 8.7 billion pounds, from 2016’s record high. The total supply of other-than-American cheeses last year included beginning stocks of about 472 million pounds, production of around 7.6 billion pounds and imports of 272 million pounds, for a total supply of 8.3 billion pounds.

The US exported 607.3 million pounds of other-than-American cheese last year, which is significant in several respects.

For one thing, that was a record for exports of non-American cheeses; the previous record, 590 million pounds, was set back in 2014, when overall US cheese exports reached a record high of 810 million pounds.

That year, exports of American-type cheeses reached a record high of 222 million pounds. So non-American cheeses last year accounted for about 81 percent of total US cheese exports, up from just under 73 percent back in the record year of 2014.

Exports of non-American cheese have grown quite impressively over the last two decades, from under 50 million pounds back in 1997 to 607 million pounds in 2017. Yes, there have been some ups and downs — exports actually fell in both 2015 and in 2016 — but overall exports of these cheeses have more than doubled just since 2010.

Then there’s nonfat dry milk and skim milk powder, domestic disappearance of which fell 6.7 percent, or almost 66 million pounds, in 2017, compared with 2016. Exports totaled a record 1.34 billion pounds.
That wasn’t quite enough to turn total disappearance positive last year (it was down about 36 million pounds from 2016), but things could have been a lot worse without those record NDM/SMP exports.

Even with record exports, commercial stocks of NDM/SMP at the end of last year, at 330.4 million pounds, were up more than 100 million pounds from the end of 2016. But that increase was due to an increase in production (47 million pounds) and a decline in domestic disappearance (66 million pounds). Just imagine how large US stocks of NDM/SMP would have been had exports not set a record last year.

Domestic disappearance of dry whey last year, at 530 million pounds, was down 1.7 percent, or 9.2 million pounds, from 2016, but exports, at 471.5 million pounds, were up 48.5 million pounds, or 11.5 percent, from 2016.
That helped boost total disappearance of dry whey to just over 1 billion pounds, the first time total disappearance was over a billion pounds since 2011. That was probably a good thing, since last year was also the first time since 2011 that the US produced more than a billion pounds of dry whey.

The one product where exports didn’t turn total disappearance positive in 2017 was whey protein concentrate. Domestic disappearance of WPC last year, at 212 million pounds, was down 7 percent, or almost 16 million pounds, from 2016, and exports, at 322 million pounds, were down 1.2 percent, or almost 4 million pounds. Thus, total disappearance of WPC in 2017, 534 million pounds, was down 3.6 percent, or almost 20 million pounds, from 2016.

Finally, as noted earlier, overall domestic use last year increased 0.3 percent from 2016 on a milkfat basis but actually declined 0.7 percent on a skim-solids basis. But when exports are included, total disappearance last year was up 0.7 percent on a milkfat basis and up 0.2 percent on a skim-solids basis.

That’s because, as ERS noted, exports increased from 8.4 billion to 9.3 billion pounds (10.7 percent) on a milkfat milk-equivalent basis and from 39 billion to 40.8 billion pounds (4.6 percent) on a skim-solids milk-equivalant basis.

Notably, ERS further noted that US import quantities actually declined last year on both a milkfat basis and on a skim-solids basis. Indeed, if you want to see how much things have changed in recent years in the dairy industry, look no further than disappearance statistics for exports versus imports. In short, imports have declined since their peak more than a decade ago, while exports were a record high on a skim-solids basis and more than triple their 2006 level on a fat basis.

 

US Dairy Industry Can Expect More Milk, More Opportunities

A couple of weeks ago, the US Department of Agriculture released its long-run projections for the US agricultural sector to 2027 and, as reported on our front page last week, the agency expects milk production to increase 1.5 percent per year over the next decade.

That would increase US milk production to 250.1 billion pounds, or 34.6 billion pounds higher than 2017’s record milk output. In short, the US dairy industry can expect a whole lot more milk to be produced in the coming years.

Historically speaking, that’s a pretty impressive milk production increase. But it’s not really unheard of in recent years. For example, US milk production grew from 170.8 billion pounds in 2004 to 201.2 billion pounds in 2013, an increase of some 30.4 billion pounds.

So how did the US deal with all that additional milk? Well, one way in which the industry didn’t deal with it was by selling more fluid milk, sales of which fell from 54.7 billion pounds in 2004 to 52.3 billion pounds in 2013.

In its long-term projections, USDA said it expects the decline in per capita consumption of fluid milk products to continue. So fluid milk products (at least traditional beverage milk products) aren’t likely to absorb any additional milk, and in fact continued declines in fluid milk sales would end up making even more additional milk available for other purposes.

When looking over production statistics, it’s pretty easy to see where a lot of the additional milk produced between 2004 and 2013 ended up. For example, Italian cheese production grew by more than a billion pounds during that period, from 3.66 billion pounds in 2004 to 4.74 billion pounds in 2013. Mozzarella output during that period grew by almost 800 million pounds, from just over 2.9 billion pounds to 3.7 billion pounds.

American-type cheese production grew less spectacularly, but still grew pretty impressively over the 2004-13 period. Specifically, American cheese output rose by some 681 million pounds, from about 3.7 billion pounds in 2004 to 4.4 billion pounds in 2013, while Cheddar output grew from 3.0 billion pounds to 3.2 billion pounds.

Notably during that period, Italian cheese surpassed American cheese in total production, and Mozzarella output surpassed Cheddar production.

Finally in the cheese category, at the state level, Wisconsin’s specialty cheese production grew from 332.1 million pounds in 2004 (accounting for 15 percent of the state’s total cheese output) to 640.2 million pounds in 2013 (accounting for about 22 percent of the state’s total cheese output).

Based on this recent history, it’s probably safe to say that a significant amount of the expected additional milk that will be produced in the next decade will end up being made into every type of cheese from Mozzarella and Cheddar to, well, to specialties that haven’t even been developed yet.

Yogurt was another major success story in the dairy industry over the 2004-13 period, with production rising by over 2 billion pounds, from 2.71 billion pounds to 4.72 billion pounds. This was, of course, the period during which Greek yogurt was introduced on a large scale, so it may be difficult over the next decade for the yogurt category to grow like it did during the 2004-13 period.

One other area worth mentioning when it comes to dealing with growing milk production over the 2004-13 period is the export market. It’s one thing to increase production of everything from Mozzarella to whey protein concentrate; it’s another thing to find a market for all of these additional products, given the relatively slow growth in the US population.

That’s where the export market came in. US dairy exports grew in value from just under $1.5 billion in 2004 to just over $6.7 billion in 2013 — an astonishing increase by pretty much any measure.

Within some major dairy product categories, over the 2004-13 period, nonfat dry milk/skim milk powder exports increased by almost 450 million pounds, cheese exports grew by about 560 million pounds, dried whey exports rose by almost 200 million pounds, whey protein concentrate exports increased by about 167 million pounds, and lactose exports grew by over 350 million pounds.

Basically, when it comes to absorbing additional volumes of milk, growth in cheese production illustrates the importance of growing domestic demand, while growth in exports illustrates the importance of growing international demand. Both will be key in the future, given USDA’s projections.

USDA, it should be noted, explains that its long-term projections are not an agency forecast about the future; instead, they are a conditional, long-run scenario about what would be expected to happen under a continuation of current farm legislation and other specific assumptions.

So there are a number of caveats when considering how much US milk production could grow in the next decade. For example, as USDA pointed out, the projections assume continuation of the 2014 farm bill, but in fact a new farm bill is due out this year and two more farm bills could be passed by the end of the projection period.

USDA’s agricultural trade projections assume that current trade agreements remain in place. At this point, with NAFTA seemingly hanging on by a thread, keeping current trade agreements in place appears to be a best-case scenario. But there are two presidential elections in the projection period, either or both of which could mean a change in direction for US trade policy.

The US dairy industry will be dealing with a lot more milk, and more opportunities, in the future.

 

Disappearance Statistics Illustrate Importance Of Exports

Let’s face it, the US dairy industry has certainly seen better years than 2017 when it comes to domestic disappearance of dairy products.

Fortunately, it’s seen very few years that have been better when it comes to exports — and also very few years that better illustrate the importance of dairy exports to the growing US dairy industry.

As reported on our front page last week, domestic use of dairy products declined for all of the dairy products tracked by USDA’s Economic Research Service except for American-type cheese, butter, and lactose.

The flip side of that is that domestic disappearance declined for other-than-American-type cheese, nonfat dry milk/skim milk powder, dry whey and whey protein concentrate (these are the other dairy products tracked by ERS).

Also according to ERS, domestic use last year increased only 0.3 percent from 2016 on a milkfat basis, but dropped 0.7 percent on a skim-solids basis.

So how did the dairy industry cope with these relatively poor domestic disappearance statistics coupled with an extra 3 billion pounds of milk (that’s how much milk production in 2017 increased over 2016)?
Exports. US dairy exports didn’t turn negative total disappearance figures positive in all instances, but it did turn at least some of them positive, and it helped improve the others.

For example, domestic commercial disappearance of other-than-American cheese last year totaled 7.179 billion pounds, down 0.1 percent, or 8.7 billion pounds, from 2016’s record high. The total supply of other-than-American cheeses last year included beginning stocks of about 472 million pounds, production of around 7.6 billion pounds and imports of 272 million pounds, for a total supply of 8.3 billion pounds.

The US exported 607.3 million pounds of other-than-American cheese last year, which is significant in several respects.

For one thing, that was a record for exports of non-American cheeses; the previous record, 590 million pounds, was set back in 2014, when overall US cheese exports reached a record high of 810 million pounds.

That year, exports of American-type cheeses reached a record high of 222 million pounds. So non-American cheeses last year accounted for about 81 percent of total US cheese exports, up from just under 73 percent back in the record year of 2014.

Exports of non-American cheese have grown quite impressively over the last two decades, from under 50 million pounds back in 1997 to 607 million pounds in 2017. Yes, there have been some ups and downs — exports actually fell in both 2015 and in 2016 — but overall exports of these cheeses have more than doubled just since 2010.

Then there’s nonfat dry milk and skim milk powder, domestic disappearance of which fell 6.7 percent, or almost 66 million pounds, in 2017, compared with 2016. Exports totaled a record 1.34 billion pounds.
That wasn’t quite enough to turn total disappearance positive last year (it was down about 36 million pounds from 2016), but things could have been a lot worse without those record NDM/SMP exports.

Even with record exports, commercial stocks of NDM/SMP at the end of last year, at 330.4 million pounds, were up more than 100 million pounds from the end of 2016. But that increase was due to an increase in production (47 million pounds) and a decline in domestic disappearance (66 million pounds). Just imagine how large US stocks of NDM/SMP would have been had exports not set a record last year.

Domestic disappearance of dry whey last year, at 530 million pounds, was down 1.7 percent, or 9.2 million pounds, from 2016, but exports, at 471.5 million pounds, were up 48.5 million pounds, or 11.5 percent, from 2016.
That helped boost total disappearance of dry whey to just over 1 billion pounds, the first time total disappearance was over a billion pounds since 2011. That was probably a good thing, since last year was also the first time since 2011 that the US produced more than a billion pounds of dry whey.

The one product where exports didn’t turn total disappearance positive in 2017 was whey protein concentrate. Domestic disappearance of WPC last year, at 212 million pounds, was down 7 percent, or almost 16 million pounds, from 2016, and exports, at 322 million pounds, were down 1.2 percent, or almost 4 million pounds. Thus, total disappearance of WPC in 2017, 534 million pounds, was down 3.6 percent, or almost 20 million pounds, from 2016.

Finally, as noted earlier, overall domestic use last year increased 0.3 percent from 2016 on a milkfat basis but actually declined 0.7 percent on a skim-solids basis. But when exports are included, total disappearance last year was up 0.7 percent on a milkfat basis and up 0.2 percent on a skim-solids basis.

That’s because, as ERS noted, exports increased from 8.4 billion to 9.3 billion pounds (10.7 percent) on a milkfat milk-equivalent basis and from 39 billion to 40.8 billion pounds (4.6 percent) on a skim-solids milk-equivalant basis.

Notably, ERS further noted that US import quantities actually declined last year on both a milkfat basis and on a skim-solids basis. Indeed, if you want to see how much things have changed in recent years in the dairy industry, look no further than disappearance statistics for exports versus imports. In short, imports have declined since their peak more than a decade ago, while exports were a record high on a skim-solids basis and more than triple their 2006 level on a fat basis.

 

California Federal Order Proceeding Continues To Drag On

Just when you think you’ve seen it all in the dairy industry, along comes USDA last week with the announcement that it will be delaying, for several months, its final decision on a California federal milk marketing order as it awaits a US Supreme Court decision on a related legal matter.

So it now appears that the California dairy industry has little choice but to sit, and wait (some more). And the same thing applies to the entire US dairy industry, albeit to a somewhat lesser extent.

That this is happening in February should probably come as no surprise to those who have been following the California federal order proceeding. It was three years ago, in February 2015, when three dairy cooperatives — California Dairies, Inc., Dairy Farmers of America and Land O’Lakes — requested that USDA call a hearing to promulgate a federal order for California.

Almost exactly two years after USDA received that petition, in February 2017, the agency released a recommended decision proposing that a California federal order be established. Comments had to be submitted by May 15, 2017, which then seemed to set USDA up for announcing a final decision this month, give or take a month or two.

Instead, California’s dairy industry is stuck in limbo. On the one hand, it seems inevitable that California’s dairy producers will vote, once a final decision is finally released, to join the federal order program, especially in light of the overwhelming support that California dairy producers gave to the proposed Quota Implementation Plan (87.2 percent of those eligible producers who voted were in favor of the QIP).
On the other hand, California’s dairy industry remains stuck, for the time being, in the state’s longstanding milk order.

The frustration of this situation is pretty obvious, especially in light of the recent petition, submitted by California Dairy Campaign and Western United Dairymen, seeking an emergency hearing to raise milk prices in the state.

As reported on our front page last week, the California Department of Food and Agriculture denied that hearing request, specifically citing the pending California federal order proceeding. Now that proceeding has been delayed.

While it was dairy producers who sought the emergency hearing in California, dairy processors also expressed dissatisfaction with current milk pricing in the state. Several cheese companies asked the CDFA to deny the hearing request, but if the agency did grant a hearing, to open that hearing up to possible changes in the Class 4b and 4a pricing formulas.

As Dairy Institute of California pointed out, the cheese make allowance in the Class 4b pricing formula hasn’t been adjusted in 10 years, while the butter and nonfat dry milk make allowances in the Class 4a formula haven’t been adjusted in seven years.

But California manufacturing costs continue to rise; as reported on our front page two weeks ago, the average cost to manufacture Cheddar cheese in California in 2016 was a record-high 24.54 cents per pound, almost a nickel a pound higher than the current 4b make allowance of 19.88 cents a pound.

Things won’t improve much for California processors if and when California joins the federal order system. The cheese make allowance in the federal order Class III formula, 20.03 cents per pound, has been in effect for almost a decade now.

And, it may be recalled, USDA’s decision to set the cheese make allowance at 20.03 cents found that the CDFA 2006 survey of average cheese manufacturing costs was the best available information representing the manufacturing cost of producing a pound of Cheddar cheese (that cost was actually 19.88 cents per pound; the 20.03 cents per pound make allowance includes a 0.15-cent per pound marketing cost adjustment).

So now, the entire US dairy industry is effectively in limbo while USDA delays the California federal order proceeding, in at least two ways.

First, there is no doubt that California joining the federal order system will have some significant impacts on the US dairy industry as a whole.
Among other things, according to USDA’s own analysis of its recommended decision, a California federal order will raise blend prices in some orders while lowering them in other orders, and will also boost milk production nationally.

Second, the problems being experienced with California milk pricing formulas are also the problems being experienced with federal order pricing formulas. One of those problems was noted earlier: inadequate make allowances that haven’t been adjusted (raised) for almost a decade.
But make allowances are going to remain unchanged for the foreseeable future.

Another problem is the continued use of the dry whey price in the Class III formula. This is impacting both California cheese makers (Farmdale Creamery, San Bernardino, CA, mentioned the “dysfunctional” whey factor that is “completely dissociated from the realities of realizable end product prices in the marketplace” when it asked the CDFA to deny the recent hearing petition) as well as cheese makers in federal orders (when USDA, three years ago this month, asked for comments in its regulatory review of federal orders, the use of the dry whey factor in the Class III formula was roundly criticized by the Wisconsin Cheese Makers Association).

Maybe the dairy industry has gotten this whole California proceeding backwards. Maybe the US dairy industry should have tried to join the California system; at least then changes could be made more quickly than they are now.

 

Storm Clouds On The US Dairy Export Horizon

For the most part, the last several years have been pretty good years for the US dairy industry from an export standpoint. Whether these positive trends continue in the future remains to be seen.

As reported on our front page this week, US dairy exports in 2017 were valued at $5.383 billion, up 15 percent from 2016 and the highest level since 2014’s record $7.1 billion. Considering that US dairy exports as recently as 2003 were under $1 billion in value, last year’s export level should be considered a great success story.

But, when looking over the list of leading US dairy export markets, we can’t help but feel more than a bit concerned about what the future holds for US dairy exports in general and exports of some key products in particular.

Let’s start right at the top, with Mexico. That country has been the leading US dairy export market for years, and last year marked the seventh consecutive year in which US dairy exports to Mexico topped $1 billion in value. Mexico is also the leading destination for US exports of cheese and nonfat dry milk, to mention just two products.

But there are at least three reasons to be concerned about the future of US dairy exports to Mexico. First, the US, Mexico and Canada are currently renegotiating the North American Free Trade Agreement, but there is some speculation that the talks will fail and the US will end up withdrawing from NAFTA.

Without NAFTA, the duty-free access the US enjoys into Mexico could evaporate and be replaced by WTO MFN (most-favored nation) tariff levels, according to the National Milk Producers Federation and US Dairy Export Council. This would “dramatically undermine a core advantage” of US suppliers as the only major dairy supplier to Mexico currently benefitting from free trade.

Second, Mexico and the European Union are currently working on an update to their trade agreement, and according to the European Commission, the EU and Mexico remain strongly committed to achieving an ambitious and balanced deal. Eucolait (the European Association of Dairy Trade) sees significant potential to increase EU dairy exports to Mexico if tariff protection is removed.

Third, Mexico was part of the original Trans-Pacific Partnership agreement (as was the US), and remains part of the recently concluded Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). So are New Zealand and Australia, two key US dairy trade competitors.

Malcolm Bailey, chairman of the Dairy Companies Association of New Zealand, said the CPTPP “does not go as far as we would like in terms of dairy access,” but adds that there are “some useful gains in markets such as Japan and Mexico.” Could New Zealand’s gains become the US dairy industry’s losses?

The number two market for US dairy exports over the last three years has been Canada, so the first and third points noted earlier (about the renegotiated NAFTA and the CPTPP) apply. Also, Canada and the EU are implementing their Comprehensive Economic and Trade Agreement, which gives the EU considerably more access to the Canadian cheese market (among other things).

That makes it at least somewhat less likely that Canada will give the US much more access to its cheese and dairy markets under a renegotiated NAFTA.

Ranking third as a US dairy export market last year was China. Last year was the third time in five years that US dairy exports to China topped half a billion dollars in value.

Last month, President Trump approved recommendations to impose safeguard tariffs on solar cells and modules imported from China.
According to a recent report from the Congressional Research Service, which provides nonpartisan policy and legal analysis to Congress, the bilateral economic relationship between the US and China has “become increasingly complex and often fraught with tension.”

Meanwhile, New Zealand entered into a free trade agreement with China back in 2008, and recently the two launched talks to upgrade that FTA. For the year ended March 2017, China accounted for 24 percent of New Zealand’s dairy exports by value, and China was New Zealand’s number one market for cheese and whole milk powder exports, among other products.

What might a renegotiated New Zealand-China FTA do to US dairy exports to China?

Japan ranked fourth as a US dairy export market last year. Japan is one of the leading dairy importers in the world, and is also part of the recently concluded CPTPP. As noted earlier, DCANZ sees some useful dairy access gains in Japan as a result of the CPTPP.

Meanwhile, the EU and Japan last year reached an agreement in principle on an Economic Partnership Agreement. Under that pact, which hasn’t yet been implemented, for cheese and dairy products, significant market access improvements were agreed for the EU’s core export products to Japan. For example, the agreement will provide for full liberalization of tariffs for hard cheeses (Cheddar, Gouda, Parmesan, etc.). And a tariff-rate quota will grant meaningful access for other cheeses, according to the European Commission.

We could go on and on here about the potential problems that could arise with key US dairy export markets. Just to cite one more example, Chile, Singapore, Malaysia and Vietnam are all among the top 20 US dairy export markets, and they are also included in the recently concluded CPTPP.

Last year was another impressive year for US dairy exports. But the road ahead appears bumpier.

Federal Orders Have Many Problems, Including Their Existence

Federal milk marketing orders are plagued with several ongoing problems, ranging from declining Class I utilization to reliance on product price formulas that either need to be updated or should be ditched altogether.

At the same time, federal orders remain quite popular among dairy producers. Indeed, they are so popular that, sometime this year, California dairy producers will probably vote to join the federal order program, greatly expanding the volume of milk priced and pooled under federal orders.

In other words, federal orders aren’t going away anytime soon. But every once in a while, we’re prompted to take a broader look at the federal order program and wonder why the heck we still have this program here
in 2018.

This “broader look” was prompted by a paper written by Daniel A. Sumner, director of the University of California Agricultural Issues Center and professor in agricultural and resource economics at the University of California, Davis. His paper, Dairy Policy Progress: Completing the Move to Markets, is one of a series of ag policy papers written for the American Enterprise Institute (for more details, please see the front-page story in this week’s issue).

AEI is a public policy think tank that is committed to, among other things, strengthening the free enterprise system in the US and globally.
Sumner sprinkles his dairy policy paper with some pretty colorful language about the federal order program. And this has us wondering why we still have this program, let alone why the program continues to grow more popular.

As Sumner points out, the federal order system dates from early in the New Deal era of the Great Depression in the 1930s. After the US Supreme Court ruled a first version of the program unconstitutional, the Agricultural Agreement Act of 1937 authorized USDA to intervene in the dairy markets only if requested by dairy farms in a given region.

And USDA, with the dairy industry’s blessing (at least the blessing of dairy producers and/or their cooperatives), has been intervening in the dairy markets ever since. In 2016 (the most recent year for which full-year statistics are readily available), almost 134 billion pounds of producer milk was pooled on the 10 federal orders. That’s about 63 percent of total US milk production that year.

Sumner wastes little time in criticizing the federal order system, noting, in the fifth paragraph of the executive summary of his paper, that US milk pricing “is dominated by an 80-year-old array of price regulations of mind-boggling complexity.”

That’s just the start. Sumner notes that there are several stated objectives of the federal order program, but that some of those objectives suffer from “vagueness of terms.” For example, one objective is to promote orderly marketing conditions in fluid milk markets, but what exactly is “orderly marketing?”

Well, among other things, it’s part of USDA’s recommended decision to establish a California federal order. Specifically, USDA’s recommended decision “finds that a FMMO for California would provide more orderly marketing conditions in the marketing area, and therefore promulgation of a California FMMO is warranted.”

But not everyone believes that California’s current marketing conditions are disorderly, or that they will become more orderly once a California federal order is established. We shall see.

Sumner goes on to describe the federal order system as an “elaborate and sophisticated set of complicated rules and regulations,” and adds that it is “hard to see how they make milk markets more ‘orderly’ except in the sense that they are now controlled by active government agents rather than forces of supply and demand.”

He also said it’s “hard to picture that milk producers and processors would fail to assure an adequate supply of beverage milk products for consumers.” That’s a valid point, given that Class I utilization has fallen from over 60 percent as recently as 1970 to under 31 percent in 2016.
That percentage will drop if California becomes the 11th federal order, given that, in 2016, California’s Class 1 utilization was just 13 percent.
Marketing orders don’t “simply gum up the gears of progress for the dairy industry, which is bad enough; they cause higher prices for consumers of beverage milk products (notably children).”

Sumner’s observation reminded us of a study, published in the journal Applied Economic Perspectives and Policy back in 2010, that found that federal order regulations are “highly regressive,” and that virtually all major groups of consumers would benefit from eliminating milk marketing orders. “Poorer families with young children gain more from eliminating this policy-induced price discrimination than do richer families with no children or older children.”

It’s hard to believe that not a single member of Congress will pick up on that point and decide that consumers would be better off without federal orders.

Finally, Sumner offers the following: “The bottom line is why, 30 years after the fall of the Berlin Wall and decades after China abandoned rigid Mao-style central planning, the United States maintains Soviet-style milk pricing. The most likely answer is that some farms and even some processors gain from the system at the expense of other producers and consumers. These winners take advantage of political inertia and fatigue among those who would benefit from change.”

If President Trump is really serious about getting rid of onerous regulations, he could do far worse than pushing for the termination of the federal order program.

 

Innovate, Innovate, Innovate

If we heard it once, we heard it 100 times at this week’s Dairy Forum 2018 in Palm Desert, CA: innovation is one of the keys to a prosperous future for the dairy industry.

Indeed, innovation is why the dairy industry has gotten to where it is today — producing over 215 billion pounds of milk, up almost 30 billion pounds from just a decade ago, and selling zero pounds to the government — and it’s also how the dairy industry will deal with a projected 34 billion pounds of additional milk by the year 2027.

How important has innovation been for dairy industry growth in recent years? Pretty important, although sometimes success has been achieved by just sticking with the basics. More on that point later.

The cheese industry has certainly benefitted greatly from innovation over the years, with everything from more specialty cheese production to resealable packaging. And more recently, cheese has become available in an almost mind-boggling array of packaging and flavor options, ranging from single-serving snack sticks and slices to dried cheese and unique added flavors.

And how has all of that innovation worked out for the cheese industry? Pretty nicely, at least from a statistical standpoint, with cheese production rising from about 8.3 billion pounds in 2000 to somewhere around 12.4 billion pounds in 2017, and per capita cheese consumption rising from about 29.8 pounds in 2000 to somewhere around 37 pounds in 2017.

Then there’s the yogurt category, which has grown from 1.8 billion pounds in 2000 to over 4 billion pounds for eight consecutive years (although, when the 2017 production numbers are released, they will show that yogurt output declined for the third straight year).

How much has innovation helped boost yogurt sales? Quite a bit. Obviously the best-known example here is Greek yogurt, which was virtually unknown outside Greece a decade ago and now accounts for a somewhere in the neighborhood of 40 percent of total US yogurt production.

But innovation has continued well beyond Greek yogurt. For example, Icelandic yogurt has only been widely available on the US market for a few years, but it’s prospects are considered bright enough that Lactalis, one of the largest dairy companies in the world, recently announced plans to acquire Icelandic yogurt producer siggi’s.

Then there’s Australian-style yogurt which, again, was hardly known outside its home country a decade ago. But Colorado’s noosa (which has been owned by private equity firm Advent International since late 2014) has gained quite a following in recent years, and appears to have a very bright future, as does the overall yogurt category, despite its current struggles (generally attributed mainly to General Mills, which has been posting double-digit percentage declines in yogurt sales in some recent quarters).

One dairy industry segment that hasn’t been all that innovative is the fluid milk sector, which still derives the bulk of its sales from plastic gallon jugs.
And so, in 2016, beverage milk sales fell below 50 billion pounds for the first time in several decades, and per capita fluid milk consumption has dropped from 247 pounds back in 1975 to 154 pounds in 2016.

Yes, there’s been some interesting innovation in the beverage milk business in recent years — particularly single-serve containers, which make milk as convenient as competitive beverages such as soda and water.

But those single-serve containers haven’t been enough to reverse the declines in sales and per capita consumption. And it’s worth noting that single-serve containers have now been around for a couple of decades, meaning they really aren’t a new innovation any more.

Still, there’s reason for some optimism with respect to milk because of its growing use outside the jug. Among other products, there’s fairlife, a partnership between Select Milk Producers and The Coca-Cola Company. And there are also a growing number of products made from coffee combined with milk, available everywhere from Starbucks to convenience stores.

There is one interesting fluid milk statistic that illustrates that it isn’t always innovation that helps boost sales; sometimes it’s just changing consumer tastes and perceptions. That is, whole milk sales, after declining steadily for decades, suddenly started to increase in 2014, and also posted increases in both 2015 and in 2016.

This is undoubtedly due at least in part to the fact that recent nutrition research has found that saturated fat isn’t the dietary villain it was long perceived to be, and also due to the fact that whole milk simply tastes better than any other type.

On a related note, butter has also been faring quite well in recent years, with per capita consumption rising from 4.5 pounds in 2000 to 5.7 pounds in 2016. Given that the majority of butter is still sold either in one-pound retail packages or to industrial or foodservice users, it would appear that innovation hasn’t been the main driver of rising butter consumption (the aforementioned reduction in fat-phobia undoubtedly has helped).

One interesting aspect of the rise in per capita butter consumption is that butter production actually declined slightly in 2014, 2015 and 2016. So for butter, one of the “innovations” that’s helped boost sales in recent years has been to import more butter from Ireland (US butter imports from Ireland rose from 5.3 million pounds in 2012 to almost 30 million pounds in 2016 and 41 million pounds in the first 11 months of 2017).
Innovation is key to the past, present and future of dairy.

 

Memo To Trump, Congress: Ditch The Dietary Guidelines

It’s been just over two years since the US Departments of Agriculture and Health and Human Services released the 2015-2020 Dietary Guidelines for Americans, which means planning for the next edition of the Dietary Guidelines is probably already underway.

Here’s hoping that President Trump, in his zeal to reduce the federal regulatory burden (or at least the federal government burden) will decide to pull the plug on that next update. And that Congress will go along with the idea.

First, a bit of background to put both the timeline and the federal “obligation” on the Dietary Guidelines into perspective. Under a law passed back in 1990, the secretaries of HHS and USDA are directed to issue, at least every five years, a report titled Dietary Guidelines for Americans.

So that’s where Congress comes in. Congress would have to amend or repeal the National Nutrition Monitoring and Related Research Act of 1990 so that the federal government was no longer obligated to publish Dietary Guidelines every five years. Of course, the federal government could still publish Dietary Guidelines without the law; they were issued voluntarily by USDA and HHS in 1980, 1985 and 1990.

As far as the timeline for development of the guidelines is concerned, one step in the process involves a Dietary Guidelines Advisory Committee, which started meeting back in mid-2013 and released its scientific report in February 2015. And establishment of the 2015 Dietary Guidelines Advisory Committee was announced by HHS in early February, 2013.

So we are conceivably just weeks away from when the process of developing the 2020-2025 edition of the Dietary Guidelines for Americans gets underway. That makes this an ideal time for Congress and the Trump administration to pull the plug on these guidelines for at least the foreseeable future.

And why should they do that? There are at least two compelling reasons.

First, a recent study examined national dietary guidelines that were introduced in 1977 and 1983 by the US and United Kingdom governments to reduce coronary heart disease mortality by reducing dietary fat intake.

The study examined randomized controlled trial evidence available to the dietary committees at the time, and found “no support” for the recommendations to restrict dietary fat (for more details on this study, please see “Evidence Didn’t Support Recommendations To Limit Intake Of Dietary Fat, Saturated Fat,” on page 3 of our Dec. 29, 2017 issue).

The public health dietary advice announced by the Select Committee on Nutrition and Human Needs in 1977 was followed by the first edition of the Dietary Guidelines for Americans in 1980. And the third of seven recommendations in the 1980 Dietary Guidelines was: avoid too much fat, saturated fat, and cholesterol.

But the review released late last year found that the evidence available at the time did not support the introduced dietary fat guidelines. And yet those dietary fat guidelines were not only introduced, they have been repeated every five years.

And let’s face it, these dietary fat guidelines have not been friendly for dairy products. Indeed, to avoid too much fat, saturated fat, and cholesterol, here’s a bit of advice from that first edition of the Dietary Guidelines: limit your intake of butter, cream, hydrogenated margarines, shortenings and coconut oil, and foods made from such products.

Five years later, in the 1985 edition of the Dietary Guidelines, the anti-fat advice was expanded a bit to include the following: use skim or lowfat milk and milk products. And while the latest edition of the Dietary Guidelines dropped the advice about dietary fat in general, it still stuck with the advice to limit intake of saturated fat.

A second reason the federal government should stop publishing Dietary Guidelines is because the science is still very unsettled. For example, the aforementioned review released late last year noted that the latest edition of the US Dietary Guidelines maintained the advice to restrict saturated fat, but the “pool of evidence does not support this recommendation,” and that the UK advice has not changed since 1983. Dietary advice in the UK and the US at least, needs “re-examination.”

Also, that review noted that diabetes and obesity “have increased since guidelines to restrict fat intake. This association needs examination.”
Just for the heck of it, we took a look at a couple of recent nutrition-related studies involving dairy products to see if their conclusions reflected the fact that the science is still unsettled.

A 2017 review found that high compared with low cheese consumption was significantly associated with 10 to 14 percent lower risks of cardiovascular disease, but also concluded that future large prospective studies “are warranted.”

Another study released last year found that a ketogenic (high-fat, low-carb) diet extends lifespan and slows age-related decline in physiological function in mice, but added that future studies “are warranted to further investigate the mechanisms through which this diet works and to optimize diet composition and feeding approaches to further extend healthspan.”

The federal government has, for over four decades, been recommending a reduction in dietary fat intake while lacking evidence to support that advice. Enough is enough. It’s time for the government to stop publishing dietary advice based on flawed, inconclusive research and to wait until more research can be conducted and better advice can be provided.

 

The Illogical World Of Retail Milk Prices

Fluid milk sales have been in the doldrums for many years now, and from time to time we can’t help but wonder if sales would improve, at least somewhat, if retail milk prices were lower.

Yes, fluid milk represents a pretty nice bargain these days. Specifically, the average retail price for a gallon of whole milk back in November, as reported by the US Bureau of Labor Statistics, was $3.15 per gallon, the lowest average November price since 2009 and more than 70 cents lower than November 2014.

Also according to the BLS, the Consumer Price Index for whole milk was 199.611 in November (1982-84=100), the fourth straight month in which the whole milk CPI was under 200. To put that in a bit of recent historical perspective, the whole milk CPI was above 200 every single month in 2012, 2013, 2014 and 2015, reaching a record high of 231.574 in September 2014.

So by these measures, fluid milk prices are quite a bargain these days. But by at least one other measure, retail milk prices are, well, they’re kind of illogical. And if they were more logical, maybe milk sales would be at least a little better.

We’re talking here about retail prices for whole and reduced fat (2 percent) milk as collected by federal milk order market administrators.
They conduct their retail milk price survey one day between the 1st and 10th of each month in 29 selected cities or metro areas located in federal order markets. One outlet of the largest and second largest food store chains and the largest convenience store chain are surveyed.

In November 2017, retail whole milk prices in the market administrators’ survey averaged $3.41 per gallon, or 26 cents higher than in the BLS survey (keep in mind that the federal order survey doesn’t include California, at least not yet, nor does it include Idaho, among other states).

What’s remarkable about the market administrators’ survey isn’t the average price per se, but rather how much those retail prices vary from city to city. And the illogical nature of some of those prices.

Back in November, average retail whole milk prices ranged from a low of just $1.99 per gallon in Cincinnati, OH, to a high of $4.38 per gallon in both Baltimore, MD, and in Boston, MA.

Between those extremes, there are cities where whole milk is a pretty good bargain, and cities where whole milk is kind of a ripoff.

For example, last November, there were eight cities (in addition to Cincinnati) in which retail whole milk prices averaged under $3.00 per gallon (and thus below the BLS average of $3.15 per gallon). And three of those cities had average retail whole milk prices under $2.50 per gallon; those cities were Houston, TX, Indianapolis, IN, and Wichita, KS.

Those four cities all make sense as far as relatively low fluid milk prices are concerned. They make sense because they’re located in or near areas that have high per capita milk production.

Per capita milk production is a data series reported every year by the Central federal order market administrator’s office. A comparison of per capita production to per capita consumption data may reflect the aggregate supply and demand balance for individual states and regions.

So, for example, Ohio in 2016 ranked 20th in per capita milk production, but is adjacent to four states that rank higher, including Michigan (which ranked 9th), Pennsylvania (12th), New York (13th) and Indiana (19th). In other words, there’s a lot of inexpensive milk moving around the Cincinnati area.

At the other extreme, retail whole milk prices averaged above $4.00 per gallon in November in not only Baltimore and Boston but also in Kansas City, MO, and in Minneapolis, MN. Based on their locations, none of these cities should really have exceedingly high retail milk prices.

Yes, Baltimore and Boston are in states with relatively low per capita milk production (Maryland and Massachusetts in 2016 ranked 33rd and 44th, respectively, in per capita milk production), but they are both located in the Northeast, where there’s been a surplus of milk in recent years. And Kansas City is right across the border from Kansas (which ranked 8th) and not all that far south of Iowa (which ranked 7th).

And Minneapolis? Good grief, why does Minneapolis have some of the highest average retail milk prices in the US? Minnesota itself ranked 6th in per capita milk production in 2016, while neighboring Wisconsin ranked second and neighboring South Dakota ranked fifth. Iowa is another neighbor.

It’s hard to believe that retail whole milk prices last year averaged 42 cents per gallon higher in Minneapolis than in New Orleans and 18 cents per gallon higher than in Miami.

So what’s going on here? According to a 2001 report from the US Government Accountability Office (then known as the General Accounting Office), a number of factors influence the price of milk at all levels of the fluid milk marketing chain, including, among others the degree of competition existing in the marketplace.

Interestingly, that GAO study looked at average retail prices for 2 percent milk in 15 cities and, in 2000 (the first year federal order reforms were in effect), the average price for all 15 cities was $2.66 per gallon. Cincinnati was lower than average, at $2.52 per gallon.

Two cities tied for the highest price, at $3.11 per gallon: Miami and Minneapolis.

Some things never change. Milk is a bargain in some areas and a ripoff in other areas, and per capita fluid milk consumption keeps declining. Isn’t that interesting?

 

Dairy Industry Isn’t Very Predictable, But In 2018...

Making predictions about the dairy industry is never an easy undertaking, but at this early stage there are at least one or two things we feel can be safely predicted about 2018 from a dairy industry perspective.

For starters, 2018 will in all likelihood be the year in which California joins the federal order system, or at least California dairy producers will have a unique opportunity to vote on joining the federal order system. Interestingly, we made a similar prediction a year ago (substituting 2017 for 2018).

Instead, we got a recommended decision from USDA in February, a comment deadline that ended in May, and then...basically nothing. But a final decision should be announced sometime soon, followed by a producer vote and then, possibly, California will become the 11th federal order.

The dairy industry can also expect to see a new farm bill this year, if for no other reason than because many key provisions of the 2014 farm bill, including the Margin Protection Program and the Dairy Product Donation Program, expire this year.

On the other hand, the dairy industry can expect to see no new farm bill this year, if for no other reason than because Congress just doesn’t pass farm bills because of expiring provisions. Just in this century, the 2012 farm bill didn’t get passed by Congress until early 2014, the 2007 farm bill didn’t get passed until 2008 and the 2001 farm bill became the 2002 farm bill.

So the dairy industry can expect a lot of talk about the 2018 farm bill, but in the end will probably see an extension of the 2014 farm bill, followed a lot of talk about a 2019 farm bill. And quite possibly some tweaks to the much-criticized Margin Protection Program.

What about prices in 2018? A couple of weeks ago in this space, we noted that prices haven’t been as volatile over the last couple of years as they were in, say, 2014, but also noted volatility might be more of an even-numbered-year phenomenon, specifically mentioning not only 2014 but also 2012 and 2016 (specifically, CME cash market prices for Cheddar blocks).

So will we see greater price volatility here in 2018? That is, of course, impossible to predict. The dairy industry is always one drought away from higher prices, and one mild summer away from lower prices. And in today’s global dairy business, those droughts could occur anywhere from New Zealand to Wisconsin, while those mild summers could occur anywhere from New York to Germany.

One point worth keeping in mind: it’s now been over three years since the block price was above $2.00 a pound. The block market first topped the $2.00 mark back in 2004, and since then also topped the $2.00 mark in 2007, 2008, 2011, 2012, 2013 and 2014. In other words, we’re overdue for a block price of $2.00 or higher.

For what it’s worth (probably not much), blocks reached $2.00 a pound after starting the year lower than they started 2018 (blocks fell to $1.5250 on Tuesday) three times: in 2011, when blocks stood at $1.3425 on Jan. 3 and reached $2.00 less than two months later; in 2007, when blocks stood at $1.3300 on Jan. 3 and reached $2.00 by mid-June; and in 2004, when blocks were $1.3050 on Jan. 5 and reached $2.00 on Mar. 19.

Prices here in 2018 will depend on many, many factors, two of which will be domestic milk production and international dairy trade. On the production front, 2017 will long be remembered for exposing problems with milk processing capacity in the Upper Midwest and the Northeast.

How will that impact production in 2018? It could be that dairy producers will be more reluctant to expand their herds now than a year or so ago.
Just to cite one statistic: milk cow numbers for the US rose from 9.331 million head in September 2016 to 9.354 million head in December 2016, but in 2017 they fell from 9.401 million head in September to 9.397 million head in both October and November.

Meanwhile, the trade front will bear very close watching in 2018. As noted in this space last week, the US basically backpedaled on trade agreements last year, withdrawing from the Trans-Pacific Partnership and launching talks to modernize the North American Free Trade Agreement.

According to President Trump’s trade policy agenda, the administration believes its trade policy goals can be best accomplished by focusing on bilateral negotiations rather than multilateral talks. That’s all well and good, but at this point it doesn’t appear that the US is actually engaged in any bilateral talks.

And even if talks with a major dairy importer such as Japan were to be launched this year, it would undoubtedly take several years before those negotiations were successfully completed and more liberalized dairy trade policies were implemented. Meanwhile, US dairy trade competitors such as the European Union continue to move ahead on successfully concluding new trade agreements.

On the regulatory front, the dairy industry in 2018 can probably expect...not much. There is at least one exception to these low expectations: under a law passed in July 2016, USDA this year has to establish a national mandatory bioengineered food disclosure standard with respect to any biengineered food and any food that may be bioengineered.

Finally, here’s a prediction that’s guaranteed to come true: Consumers will continue to be irrational in 2018. The bad news is that plant-based foods will continue to steal market share from real dairy products, despite their nutritional, taste and other shortcomings.

The good news is that, in 2018 as in every other year, consumers have to eat, and dairy products offer unparalleled value.

2017 From A Dairy Perspective: The Year Of Trump

Trying to figure out some sort of dairy-related “theme” for any given year is seldom if ever an easy undertaking, save for the occasional year when prices reach record highs, such as in 2014, or historic lows, such as in 2009; or when a far-reaching farm bill is passed, such as in 2014 (there’s that year again), when the farm bill terminated the Dairy Product Price Support Program, the Milk Income Loss Contract program and the Dairy Export Incentive Program and created the Margin Protection Program for dairy producers.

What about 2017? Was there an overriding theme this year? Well, we think so; this past year has clearly been the year of President Trump.
It’s difficult if not impossible to recall a President having more influence over the dairy industry in his first year in office. President Trump’s influence spanned the spectrum from domestic to international issues.

On the domestic front, Trump’s first year will be remembered for several regulatory initiatives. For one thing, back in August, the US Food and Drug Administration issued guidance to industry stating that it will exercise enforcement discretion regarding the use and labeling of fluid ultrafiltered milk to make standardized cheeses and related cheese products.

To say this was a long-awaited decision would be an understatement; FDA was first petitioned on the fluid UF milk issue some 18 years ago, during the Clinton administration. So the new FDA guidance represented some mighty welcome progress on an issue of great importance to the dairy industry.

Meanwhile, the Trump administration slowed the progress of at least a couple of FDA initiatives.

First, during President Obama’s final year in office, FDA had published final rules on the updated Nutrition Facts food label and on serving sizes.
Compliance dates were set at July 2018 and July 2019, depending on the size of the food company.

Several months ago, FDA proposed to extend the Nutrition Facts and serving size final rules by about a year and a half, to Jan. 1, 2020, for larger companies and to Jan. 1, 2021, for smaller companies.

Second, FDA last spring decided to extend the compliance date for menu labeling requirements from May 5, 2017, to May 7, 2018. Those menu labeling rules apply to restaurants or similar retail food establishments that, among other things, sell restaurant-type foods.

Finally on the domestic front, FDA has invited comments and information to help the agency identify existing regulations that could be modified, repealed, or replaced to achieve meaningful burden reduction while still allowing the agency to achieve its public health mission. Comments are due by Feb. 5, 2018, after which the agency might decide to scrap some of its less-popular regulations (of which there are probably many).

It is arguably on the international front that the Trump administration has had the most dairy-related impact this year, in both positive and negative ways.

Trump’s international activities began almost on day one of his administration. It was actually on Jan. 23, 2017, that Trump signed a memorandum directing the US Trade Representative to withdraw the US as a signatory to the Trans-Pacific Partnership.

The TPP, it may be recalled, included the US along with major dairy exporters such as New Zealand and Australia and major dairy importers such as Japan and Mexico. A 2016 report from the US International Trade Commission concluded that, under the TPP, US dairy exports to TPP member countries would increase $2.0 billion relative to the baseline, while dairy imports from all TPP members would increase $369 million after full implementation. Now, we’ll never know.

The TPP will continue without the US, and it can be expected that some US competitors will take advantage of reduced trade barriers in some countries. For example, New Zealand will gain new dairy market access to Japan, Mexico and Canada under the new Comprehensive and Progressive Agreement for TPP.

Several months after withdrawing from the TPP, the Trump administration announced its intention to renegotiate and modernize the North American Free Trade Agreement. This is of course huge for the US dairy industry, since Mexico and Canada are the two largest markets for US dairy exports (on a value basis).

Five rounds of NAFTA talks have taken place so far, with another round scheduled for January 2018. There is some speculation that the US will eventually withdraw from NAFTA, which would be a highly unfavorable development for a US dairy industry that is increasingly reliant on exports.

Specifically regarding Canada, Trump himself mentioned Canada’s dairy pricing policies on at least a couple of occasions last April, a real rarity for any President. The US is attempting to resolve this issue in the ongoing NAFTA negotiations, but Canada appears intent on keeping its Class 7 pricing policy.

While the US has backpedaled on trade, many of its dairy competitors have continued to move forward. As noted earlier, the TPP (now the CPTPP) will move ahead without the US. Meanwhile, the European Union recently concluded trade talks with Japan, and just last week the EU and Mexico concluded the seventh round of talks on a new trade agreement.
President Trump and his administration generated many dairy- and food-related headlines in 2017, and set the stage for much more to come. And he’s still got more than three years to go before his first term is finished.

 

Price Volatility? What Price Volatility?

The phrase “price volatility” has become kind of a cliche here in the 21st century dairy industry. Prices go up, prices go down, sometimes pretty substantially — and sometimes in a single week.

But a funny (or not so funny, depending on your perspective) thing has happened here in 2017: prices haven’t really been all that volatile, by some 21st century measures. It’s actually been kind of a boring year, dairy price-wise.

To put this in some historical perspective, we thought we’d compare two years, one from the era of little or no volatility and one from the current era of sometimes extreme volatility.

The year 1982 was certainly lacking in price volatility; there were exactly four Cheddar 40-pound block price changes at the old National Cheese Exchange that year, two of which were one-cent changes and the other two of which were quarter-cent changes. The block market that year ranged from a low of $1.3525 per pound (for the first eight and a half months of the year) to a high of $1.3725 per pound.

And the Minnesota-Wisconsin price (predecessor of today’s Class III price) in 1982 ranged from a low of $12.42 per hundredweight to a high of $12.62 per hundred.

Fast-forward to 2014, and the block price on the CME (which trades every day, as opposed to the weekly trading at the old NCE) ranged from a low of $1.4950 per pound to a record high of $2.4500 per pound (and that was all in the last four months of the year), a difference of almost a dollar.
And the Class III price ranged from a low of $17.82 per hundred to a record high of $24.60 per hundred.

How about here in 2017? Cheddar blocks at the CME have ranged from a low of $1.3600 per pound back in mid-March to a high of $1.8500 per pound in early February (that was the only day this year that the block market was above $1.80 per pound), a range of less than 50 cents from low to high.

As noted earlier, that’s considerably less volatile than in 2014, but also less volatile than in 2016 (when the block price ranged from $1.2700 to $1.9425 per pound, a difference of 67.25 cents), or in 2012 (when the block price ranged from $1.4600 to $2.1200 per pound, a difference of 66 cents per pound).

Maybe volatility is more of an even-numbered-year phenomenon. Not only have blocks traded in a fairly narrow range this year, that was also the case in 2015 (a low of $1.4000 and a high of $1.8000 per pound) and in 2013 (a low of $1.5500 and a high of $2.0000 per pound).

The CME cash butter market has also been lacking in price volatility, relatively speaking, this year. Again, let’s use 2014 as an example of extreme volatility. That year, the CME butter price ranged from a low of $1.5400 per pound to a high of $3.0600 per pound, an astonishing difference of $1.52 per pound.

This year, the CME cash butter price has ranged from a low of $2.0625 a pound back in mid-April to a high of $2.7375 a pound in early August, a difference of 67.5 cents per pound.

The butter price range this year is actually notable for a couple of reasons. First, it’s far narrower than in at least a couple recent years — specifically, in 2014 and in 2015, when the butter price started the year around $1.55 and eventually soared above $3.00.

Also, barring a last-minute collapse, this will end up being the first year ever that the CME butter price remained above $2.00 per pound for the entire year. Or any other CME cash market price, for that matter.

The lack of volatility in CME cheese prices has translated into a lack of volatility in the Class III price, which has ranged from a low of $15.22 per hundred to a high of $16.88 per hundred, a difference of just $1.66. The last time the Class III price range for an entire year was under $2.00 was back in 2005, when it ranged from a low of $13.35 to a high of $14.70 per hundred.

These relatively stable farm milk and dairy commodity prices in 2017 have translated into relatively stable consumer prices as well. Through the first 11 months of this year, the Consumer Price Index for dairy products has ranged from a low of 215.192 (1982-84=100) to a high of 220.552.
By contrast, back in the extremely volatile year of 2014, the CPI ranged from 219.362 to 229.87.

There are several caveats to all of this price volatility, or lack of price volatility, here in 2017. First, comparisons going back before 1998 can be somewhat misleading, since prior to September of that year cash trading took place just once a week. There are now over 250 chances for prices to change every year, compared to 52 chances (or 53, depending on the year) back in the old days.

Second, weekly averages matter as much if not more than daily price changes. So, for example, the block price did reach $1.8500 a pound back in early February, but the average block price that week was $1.7475, indicating that the $1.8500 price was kind of an anomaly.

Third, federal order prices are established using cheese, butter, dry whey and nonfat dry milk prices from the AMS “National Dairy Products Sales Report,” rather than CME prices. Those prices aren’t quite as volatile as CME cash market prices (even comparing them to weekly average cash market prices).

Despite the relative lack of price volatility this year, cheese, butter and milk prices remain highly volatile from a historical perspective. After all, any time the block price changes five times in a single week (which it did most recently during the week of Nov. 13-17), it can be said that block prices changed more during one week than during all of 1982. That’s pretty volatile.

 

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