Dick Groves
Editor, Cheese Reporter

 

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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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