Dairy: A Good Bet in a Bad Economy

Dairy A Safe Bet For State Investment

Volume 133, No. 45 Friday,May 8, 2009

Wisconsin Governor Jim Doyle has made dairy processors a key target for state and federal funds related to energy conservation and energy generation.

This news, delivered by Governor Doyle at the Wisconsin Cheese Industry Conference, joins the governor’s earlier success, along with a bipartisan group of legislators, in providing an investment tax credit to Wisconsin's dairy product manufacturers.

It’s official: dairy is good bet for state investment.

In a down economy, Wisconsin’s legislature and governor are recognizing that core industries like dairy processing are retaining employees, continuing to spend dollars in their local economy and remaining optimistic for future growth and investment.

At the Wisconsin Cheese Industry Conference in April, an expert panel laid out technologies, costs and payback for constructing anaerobic digesters to capture methane produced by cheese plant whey permeate and wastewater streams. Energy producing technology is “shovel ready,” and now cash incentives for this energy generation concept are moving through government pipelines.

While the governor is targeting dairy for future energy generation incentives, Wisconsin’s investment tax credits for dairy processors are already here: 2008 marked the second calendar year for the credits. In 2007, 14 companies earned a portion of $600,000 in credits and in 2008, 26 Wisconsin dairy manufacturers applied for a share of $700,000 in tax credits.

Wisconsin’s $20 billion dairy industry has moved to the economic foreground as the state and the nation struggle through difficult times.

The dairy industry has not escaped recession. Dairy producers are facing perilously low milk prices as related prices for cheese, butter, whey and nonfat dry milk remain low. Nationally, milk production turned negative in March - the first monthly milk production decline in five years.

At the same time, Wisconsin dairy producers increased milk production in March by nearly 2 percent, partially offsetting declines in California, New York, Idaho and Pennsylvania. March cheese production jumped in Wisconsin and other states (against falling butter production), with Wisconsin producing 6.5 percent more cheese than in March 2008.

While the national milk supply is turning downward, the issue in this economy is demand. The demand picture for cheese is complex, with retail grocery and deli sales solid and foodservice demand off, especially at “full service” restaurants and among pizza chains.

Pizza Hut, Domino’s and Papa Johns reported negative to slightly positive sales in the first quarter of 2009, an improvement over the last quarter of 2008 when these chains reported sales down 2-3 percent.

As pizza goes, so goes the dairy industry: delivery pizza accounts for 40 percent of all US cheese used in foodservice, and foodservice (restaurants, supermarket prepared foods, hospitals, etc.) is the dominant outlet for all cheese. Forty-one percent of all US cheese is sold into foodservice, while 37 percent is sold in supermarkets and 22 percent to food processors.

The National Restaurant Association stated last week that restaurants reported negative same-store sales for the tenth consecutive month in March. Sixty-three percent of operators reported a same-store sales decline in March, up from 56 who reported negative sales in February.

Dairy exports, the darling of 2008, also are down in an economy that is slumping worldwide. USDA’s Economic Research Service expects exports to decline 33 percent (in the federal fiscal year ending in September 2009).

Deborah Perkins, managing director at Rabobank International, described a global economic downturn at the annual meeting of the US Dairy Export Council April 29. Global industrial production, which has averaged 5 percent annual growth in the past five years, dropped to negative 12 percent growth in February 2009 compared to February 2008.

Milk production among leading exporters (USA, EU, Australia, Argentina) was up 3 percent in the first quarter of 2008 but dropped to less than 1 percent growth by fourth quarter, Perkins reported. She expects milk production to decline throughout 2009 in these nations, but New Zealand will see a gain, up about 5 percent, after declining 4 percent last year due to drought.

Overall, Perkins expects dairy commodity prices to remain weak through at least the first half of 2009 with various government interventions providing a floor. She predicted “meaningful” price recovery at best in late 2009 and possibly in early 2010.

While economic conditions are impacting dairy’s bottom line, Wisconsin Governor Doyle and the state legislature are betting on investment in dairy to provide jobs, new energy and economic activity in the long term. It’s a good bet. r

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

Wisconsin's Future: Growth
Keeping Sustainability Real
Nose Dive
Dairy Dives into 2009
Consider This...
 Fulls Vats
Implement Make Allowances ASAP
Security Reforms
Spring Forward
A Week of Clarity
The California Whey

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