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What happened? What’s next? - Not all fluid milk sales news is bad

Progressive Dairyman Editor Dave Natzke Published on 11 September 2018

You’re busy – milking cows, managing employees, harvesting crops. With that in mind, Progressive Dairyman launched 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. Then, we’ll seek out experts and sources putting that news into perspective and, most importantly, briefly describe how it might affect you.

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COMMODITY PRICES AND CASH RENTS

What happened?

Lower commodity prices have reduced the income-generating potential of rented cropland. Trade disputes have added uncertainty. It is likely non-land production costs will increase. With this as the backdrop, negotiations for 2019 rental agreements are underway.

What’s next?

Re-evaluating long-run income potential from farmland seems warranted, according to ag economists Gary Schnitkey and Carl Zulauf. Cash rents are “sticky”: Landowners are reluctant to lower cash rents; farmers are reluctant to ask for lower rates because of competition for farmland.

Read “Setting 2019 Cash Rents with Price Uncertainty due to Trade Disputes”.

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A renter strategy of taking current losses on rented farmland in the hopes of higher returns in future years is risky, Schnitkey and Zulauf warn. Based on current conditions, flexibility in setting 2019 rents is a growing priority.

One alternative is to wait to set cash rents until later in 2018, or early in 2019, in the hopes some trade and price uncertainty will diminish. Another alternative might be to negotiate a variable cash rental arrangement, which changes the cash rent based on revenue outcomes.

Rental arrangements for dairy farmers operate a bit differently than those from cash-crop producers, said Sam Miller, managing director and head of agricultural banking with BMO Harris Bank. Rental rates for grain producers tend to respond more quickly to economic signals, as the return on the land rent will be determined by grain yield and price.

In the case of dairy farmers, they rent land for feed needs and for spreading manure for crop production. The multiple value of land availability for dairy farmers makes land rents less responsive to quick changes in milk or grain prices.

Dairy farmers tend to seek longer-term rental arrangements, particularly for land close to their facilities. Transportation costs add up quickly for dairy farmers who haul higher-moisture feed (corn silage and haylage) and liquid manure.

Dairy farmers should always be evaluating their expenses, and land rents can be a higher expense. The need to lock up land for spreading manure is key. Then evaluate cost of growing feed versus buying it to determine if the cost differential is worth lowering costs by purchasing some feed as opposed to growing it. Lower milk prices lead to tighter margins, and reducing expenses and cost takes on greater importance.

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It’s always a good idea for producers to periodically look at their fixed costs and make sure the economics still make sense, said Chris Laughton, director of Knowledge Exchange at Farm Credit East. There really isn’t a “rule of thumb” other than to perform a cost-benefit analysis from time to time rather than just automatically doing the same thing every year.

DAIRYAMERICA CLASS ACTION LAWSUIT

What happened?

A California federal court is reviewing a proposed $40 million settlement agreement in a class action lawsuit (Carlin et al. v. DairyAmerica Inc. et al.) stemming from nonfat dry milk sales more than a decade ago.

At the center of the lawsuit are nonfat dry milk prices reported to the USDA’s National Ag Statistics Service (NASS) by DairyAmerica Inc. from April 2006 to April 2007. A USDA audit revealed the sales reports included prices from long-term contracts, a practice prohibited by law.

Because the NASS prices were used to establish Federal Milk Marketing Order (FMMO) minimum milk prices, it resulted in lower milk prices paid to farmers. The USDA calculated the reporting errors reduced dairy farmer income by about $50 million. The lawsuit alleged DairyAmerica and a shareholder, California Dairies Inc. (CDI), were liable for the misreporting.

DairyAmerica and CDI acknowledged the erroneous reporting but admitted no intentional wrongdoing in the case. The USDA had immunity in the lawsuit.

What’s next?

According to lead plaintiff attorney George Farah, a partner in the law firm of Cohen Milstein, a ruling on the preliminary settlement agreement is likely in September. If approved, notices will be sent to every dairy farmer (as many as 40,000) who marketed milk through a FMMO during the affected period. The notice will describe the settlement and offer those dairy farmers the opportunity to accept the settlement and submit a claim form or opt out of the settlement.

A final hearing on the settlement agreement is likely in December or January. If the agreement is not approved by the court, litigation resumes. If it is approved, dairy farmers who submit claims will be eligible for a portion of the settlement, prorated based on the number of farmers filing a claim and the volume of milk they marketed. Payments are likely sometime next year.

California’s dairy farmers won’t be likely to see any money from a settlement. That’s because California was not part of the FMMO system during the time period, and the state order’s minimum milk pricing formulas did not include NASS pricing data.

FLUID MILK SALES

What happened?

Gallon of milk

Only organic whole and reduced-fat milk (2 percent) were able to withstand a June 2018 downturn in sales, according to the USDA’s Dairy Market News. At 3.6 billion pounds, overall sales of packaged conventional and organic fluid milk were down 4.1 percent compared to the same month a year earlier. The June total is quite likely the lowest volume for a single month dating back at least to the mid-1980s.

What’s next?

Not all the news related to fluid milk sales is bad. IRI data provided by Dairy Management Inc. shows retail sales of flavored milk, representing about 6 percent of retail milk sales volume, are in a fourth year of growth.

Whole milk continues to be a growth segment; it has a 38 percent share of total retail milk volume, up from 28 percent in 2012. IRI data revealed 60 percent of households purchased whole milk over the past 52 weeks; the average buyer purchased 18 gallons. Lactose-free has also been a continuous growth driver for milk, doubling its share of retail milk sales volume since 2012. The average number of lactose-free milk items in a store has increased from 10 to 18.

Short-term help is also coming. Schools are back in session, providing an uptick in Class I sales. Also, the USDA will purchase $50 million worth of fluid milk (estimated at between 12 million and 15 million gallons) for distribution to domestic food assistance programs.  end mark

PHOTO: Gallon of milk. Photo by Gettyimages.

Dave Natzke
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