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come down to this: if processors cannot afford to pay the government-set minimum prices, the orders will have to be repealed.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


Other John Umhoefer Columns
A Year For Decisive Action
Down Under
A Closer Look at Stressed Margins
Deconstructing Government’s Role in Dairy
A Difficult Year
Rebound and Regulation
rBST Free or Not to Free
Regulators Lag Behind a Dynamic Industry
A Dutch Perspective

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