Dairy Faces Structural Changes In Milk, Corn Prices
Repeal Orders If Processors Cannot Pay
Government - set Minimum Prices
Volume 131, No. 32 Friday,
February 9, 2007
The unprecedented rise in the price of dry whey in the past few months has created record deterioration in margins for cheese manufacturers. In January, for the first time, the milk and cheese value flipped: the price of Cheddar cheese measured by NASS was lower than the Class III price for cheesemilk.
The result is across-the-board losses for cheese manufacturers. In 2000, USDA incorporated the value of dry whey into its new Class III price formula, yet to this day most cheese manufacturers earn a lesser value for their whey, or make other whey products that have not matched the meteoric price gains of whole dry whey.
The question cheese manufacturers are asking is: how long will this tight
market for whey protein last?
Some structural changes point to tight markets for dairy protein into
the foreseeable future. Due to extended drought, Australian milk production
has been in decline since 2002 and has flattened out at about 22.2 billion
pounds (similar to production in Wisconsin).
Since 2004, European Union milk powder exports have declined as a result of shrinking domestic production. That trend is expected to continue as the EU reduces subsidies to dairy farmers.
USDA may not have foreseen prices such as 50 to 60 cents per pound for
dry whey when it built milk price formulas, but it built no mechanism
to control the impact of price increases.
And at this time the Class III price is simply unaffordable to many milk
buyers.
Philosophical debates over the merits of federal milk marketing orders will come down to this: if processors cannot afford to pay the government-set minimum prices, the orders will have to be repealed.
Another curveball for the dairy industry is a structural change in the
use of corn.
Reduced corn production in 2006 and demand for corn by ethanol manufacturers has driven corn prices to $4 per bushel. Milk producers purchasing corn will face prices more than 50 percent higher than one year ago.
According to data gathered by Wisconsin Agri-Service Association (WASA),
current US production of ethanol is 5.6 billion gallons with another
6.1 billion gallons of capacity under construction. All of this new production,
WASA noted in a recent report, will be easily integrated into the market
with additional demand pushing the market to grow further.
In fact, if the entire United States corn crop were converted to ethanol, this production would only displace about 20 percent of US gasoline usage.
In Wisconsin, five existing ethanol plants last year purchased 85.5 million
bushels of corn or 22 percent of Wisconsin’s five-year average for corn
production. WASA estimates that production by these facilities and four
more that are currently being constructed in Wisconsin will utilize 50
percent of this five-year average for corn production in the state by
the end of 2007. (This figure is slightly lower, 48 percent, when looking
at 2006 corn production in Wisconsin rather than a five-year average.)
Stated simply, by 2008 ethanol plants in Wisconsin will purchase the
equivalent of half of Wisconsin's corn crop. And Wisconsin today only
produces 4 percent of the nation’s ethanol.
Like the tightened market for dairy proteins, structural changes in the use of corn have sent prices soaring. But how long can this new price level be sustained?
Interestingly, WASA reports that the Bush administration’s proposed 2007
farm bill includes no subsidy incentives for corn used in ethanol, but
will provide incentives to develop cellulosic ethanol. Cellulosic ethanol
can be derived corn stalks and cereal grain straws, as well as paper
pulp and sawdust. Energy crops grown specifically for fuel production
such as switchgrass and miscanthus are another feedstock for cellulosic
ethanol.
WASA reports that a small number of ethanol plants will begin retooling in the next two years to ferment cellulosic sources and Wisconsin is uniquely positioned to convert pulp from paper mills into ethanol.
Brute economics, and a few government subsidies, will determine where
corn prices net out in the volatile future for ethanol.
But one thing is certain: no federal marketing order for corn stands
between producers, processors and consumers, and the corn industry wouldn’t
have it any other way. •
John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at
jumhoefer@wischeesemakersassn. org
|
