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What happened? What’s next?

Progressive Dairyman Editor Dave Natzke Published on 10 July 2018

You’re busy – milking cows, managing employees, making hay. In our regular conversations with our team of editorial advisers, we learned they not only wanted a recap of dairy news, but they were seeking brief insights into how that news might impact their dairy business going forward.

With that in mind, Progressive Dairyman is launching this column: “What happened? What’s next?” In recognition of your time, we’ll attempt to summarize recent events or actions making dairy headlines and reported in our weekly digital newsletter, Progressive Dairyman Extra.

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Then, we’ll seek out experts and sources putting that news into perspective and, most importantly, briefly describe how it might affect you.

Interest rates

What happened?

The Federal Reserve raised its benchmark short-term interest rate in June. It was the seventh increase since 2015 and brings the Fed’s benchmark rate to a range of 1.75 to 2 percent. The last time the rate topped 2 percent was in late-summer 2008.

What’s next?

Perhaps even more importantly, the Federal Reserve signaled two additional rate increases were on the way this year, with three more rate hikes possible in 2019.

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What does this mean for the agricultural sector and borrowers? In short, higher interest rates put pressure on margins as interest expense increases.

For a dairy producer with $5,000 debt per cow, every quarter-point rate increase means an additional $12.50 per cow of added interest expense per year. Said another way, if rates rise by 1 percent (or four moves of the current pace of a quarter-point), the same producer would have an extra $50 per cow per year of increased interest cost.

There are many headwinds facing dairy and agricultural producers – trade issues, milk prices, feed prices and interest rates. Managing expenses and protecting milk prices continue to be important components to navigating the current environment.

—Sam Miller, managing director, group head, agricultural banking, BMO Harris Bank

Fluid milk consumption

What happened?

April 2018 sales of conventional and organic fluid milk were steady with year-earlier levels, halting – at least for a month – a lengthy and ongoing downward trend. Total U.S. packaged fluid milk sales were estimated at 3.9 billion pounds for the month, up 0.4 percent from April 2017.

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U.S. sales of conventional products totaled 3.6 billion pounds, up 0.2 percent from the previous year, while sales of organic products, at 211 million pounds, were up 4.9 percent. Organic represented nearly 5.5 percent of total sales for the month.

What’s next?

In the years ahead, the market for plant-based milk alternatives will continue to grow, though it will be at a slower rate than in recent history. The segment is maturing, and new entrants over time will increasingly be competing to take share from almond milk rather than from cow’s milk.

Meanwhile, the decline in cow’s milk consumption will continue, but the rate of decrease will slow as premium products capture attention from consumers who would otherwise switch to plant-based milks or may consume both.

Although it slowed somewhat in 2017, demand for organic milk had experienced strong growth over the past several years. Ultra-filtered milk brand “fairlife” milk has experienced stronger growth than the combined plant-based sector since its introduction in 2015. Whole and flavored milks are also bucking the downward trend.

As cow’s milk segments into new offerings, the efficiencies of traditional large-scale supply chains will be challenged to work with smaller volumes of a wider variety of more specialized products. Additionally, marketing costs and slotting fees at grocery stores will increase across the board and pressure the already low-margin traditional milk business.

—Ben Laine, senior economist, CoBank, writing in the June CoBank Knowledge Exchange, “Competition is Reshaping the Milk Business.”

California FMMO

What happened?

California producers voted to join the Federal Milk Marketing Order (FMMO) system.

What’s next?

The USDA has begun to put in place the machinery to implement the California FMMO starting on Nov. 1, 2018. That means they will announce advanced milk prices that will be enforced on California processors for Class I and Class II milk on Oct. 17, 2018.

It means the California state order officials are in the process of wrapping up their responsibilities for milk pricing enforcement and putting in place the mechanism to administer the Quota Implementation Plan.

It means the Producer Security Trust Fund board is having discussions about what will be necessary to transition this program from its current status and practice as part of the state system to a state program operating in an order controlled by federal law with some very different rules.

The California Dairy Council is discussing what steps need to be taken to modify its state order funding mechanism to allow it to continue after the state order disappears. So there are details to take care of.

On the producer side, where you sell your milk has always been important, but in an FMMO, the rules change and different handlers will make different choices: location matters; Class I usage matters; transportation costs matter. As a result of these factors, how cooperatives decide to pay their producers may change. So between now and November, producers need to be asking questions of their handlers.

The handlers, too, both cooperative and proprietary, are trying to figure out how they fit into what will be a different milk marketing environment than what California has had for the past 40 years. Every day, over 2,000 truckloads of milk are produced on California’s dairy farms. Every day, those 2,000 trucks need to be delivered to a buyer efficiently and, hopefully, profitably.

Our cooperatives are responsible for managing much of this. However, this challenge is really no different than what happens in all the other FMMOs in the country; it’s just new for the California industry – so we need to be diligent but patient and also recognize we need to be adaptable because it’s pretty certain we won’t get it exactly right the first time.

—Geoffrey Vandenheuvel, director of regulatory and economic affairs, California Milk Producers Council  end mark

Dave Natzke
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