Dancing with the Devil in the Details

Volume 140, No. 14, Friday, October 2, 2015

Last week, the morning after an Upper Midwest seminar on federal milk marketing orders, the hotel staff reset the meeting room with a hardwood dance floor. That parquet floor should have been set up a day earlier as the industry attendees danced to the tune of the 80-year-old federal dairy program.

Timeless federal orders are front page news again as USDA opened its public hearing September 22 to consider a new milk marketing order in California.

California was the focus of discussion at the Bloomington, MN, federal order dance. Dairymen in California look to federal orders and envision a higher price for milk, Mike Brown, economist for Glanbia Foods, told attendees.

In August, USDA performed a preliminary economic impact analysis on the main “cooperative” proposal for a new federal order and found that the all-milk price in California would rise by $1.03 per hundredweight of milk (averaged over 2017 to 2024). Yet at the same time, national prices for Cheddar cheese, butter, nonfat dry milk and dry whey would fall, and the all-milk price in the Upper Midwest was predicted to fall nine cents per hundredweight.

Is this sunny scenario of higher milk prices in California an accurate picture of the future? At the Bloomington seminar, Brown speculated that rising prices for California milk, fueled in part by a more generous value for whey in the cheese milk price, may cause processors to turn away from cheese production and toward dried milk products.

A higher milk price for cheese makers in California would make cheese makers in other regions more competitive, and Cheddar prices and milk prices in the Upper Midwest may rise, not fall, Brown speculated.

The federal order proposal from California cooperatives also denies any depooling. That means cheese plants would be forced to remain in California’s federal order pool at all times, even when a spike in cheese prices could force cheese makers to pay large sums into the milk pool.

More than any other factor, the value of whey in the milk price has captured the attention of California dairymen in recent years. The state has held multiple hearings to translate strong whey prices to cents added to the state’s Class 4b milk price.

At each hearing, California cheese makers – particularly smaller businesses with limited whey processing – argued against the tide of rising whey values for dairymen. Now these California dairymen are reaching for the brass ring – the uncapped value of whey embedded in federal milk marketing orders’ Class III price for cheesemilk.

It’s the worst possible news for cheese makers in California. For years, cheese makers across the US have lost money on whey, paying farmers more for whey in the Class III milk price than the cheese maker earns in the marketplace (see table). The Class III price formula incorporates the value of dried whey, but no small or mid-sized cheese maker can afford to build a factory to dry whey.

Even large cheese makers with whey processing capacity have seen red ink in recent years. Dollars earned for more desirable whey protein concentrates haven’t matched dried whey earnings. Yet dried whey is only 23 percent of all whey product production in the US and production of dried whey is steadily dropping.

California has the opportunity to build a new take on federal milk marketing orders. For example, the 80-year-old mandate that milk marketing orders create “orderly marketing” can be achieved with a Class III price that doesn’t threaten to put small and mid-sized cheese makers out of business.

The whey value in the federal order Class III price is too high, built on a whey product that few processors can afford to make, and fewer buyers even want. Perhaps as California takes to the federal order dance floor, dairymen and dairy processors can partner to make sense of dairy’s tired waltz.

Net Earnings on Whey Per Hundredweight of Milk

January - $2.4229
- $2.2803
- $1.8542
- $1.9377
Febraury - $2.1430
- $2.2198
- $2.0196
- $1.5458
March - $1.9765
- $2.0269
- $2.1633
- $1.3707
April - $1.8934
- $1.8403
- $2.2926
- $1.2624
May - $1.6158
- $1.8246
- $2.2800
- $1.1783
June - $1.4253
- $1.8157
- $2.3323
- $1.0721
July - $1.4478
- $1.8444
- $2.4066
August - $1.6443
- $1.8247
- $2.4163    
September - $1.9168
- $1.8233
- $2.3600    
October -$ 2.1150
- $1.7461
- $2.2715    
November -$ 2.2740
- $1.7856
- $2.1953    
December -$ 2.3468
- $1.6899
- $1.9180    

The table above shows one actual Wisconsin cheese maker’s earnings on whey per hundredweight of milk, less the federal order mandated value of whey in the Other Solids price. Each month in the past six years, this cheese maker has been forced to pay dairy farmers more for whey than the factory earned for whey in the marketplace. Data from the most recent years is shown below. This cheese factory markets skimmed wet whey warm from the vat and their negative earnings are a relentless cascade of red ink. JU

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@wischeesemakers.org


Other John Umhoefer Columns

 Phosphorus’ Final Act

 20 Years of Change In One Bite
 The Whey Problem and California’s Solution
 The System Works - March 6, 2015
 100 Years of Success
 Thoughts for a Dairy Forum

 A Different Dairy Scene in 2015
 The Truth About Animal Care
 A Regulatory Hat Trick
 Flawed Security Program Bilks Wisconsin Dairy
 Leading Cheese Producers
 Success by the Numbers
 It’s Time for Training
 Exports Trump Farm Bill
 Wisconsin Specialty Cheese Institute’s 20-20 Vision
 Addressing Wastewater Head On
 Knowledge Opportunities Abound
 Say No to an Extreme Raw Milk Bill
 A Generation's Gift
 Government-Induced Uncertainty

 Decades Ahead on Food Safety
 Wisconsin’s Hot Winter
 A Successful Campaign for Babcock
 Ireland: Gearing Up For Growth
 Mired in Wash Water
 Less Government, More Dairy
An Interview With Jim Sartorii
The Other Solids Price Crush

 The Policy Answer Is Exports
 Rolling The Dice On Dairy Reforms
 Productive Changes In Wisconsin

 The Successful Idea Of DBIC
 Cheese Cuts Both Ways:
Consolidation and Growth
 IDFA's Deep Dairy Reforms
 Wisconsin In The Spotlight
 An Overbuilt Foundation

 What the New Governor Means To Wisconsin
 No Man's Land
 Dairy & Wisconsin’s New Leadership

Wisconsin Cheese Is Investing, Expanding
 Talking Competition
 Being Big Dairy
Upper Midwest Prospects in 2010
Upper Midwest Growth: Perspectives From The Farm
Blue Skies or Bust
Pushing Back Against A Tough 2009
Support Demand, Not Price
Dairy: A Good Bet in a Bad Economy
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

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