Dick Groves
Editor, Cheese Reporter


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USDA’s Rules Of Practice For Federal Orders Aren’t Working

The 2008 farm bill included a section that required the US Department of Agriculture to establish supplemental rules of practice for amending federal milk marketing orders. Basically, these rules were intended to speed up the federal order amendment process.

USDA’s Agricultural Marketing Service published a final rule establishing these supplemental rules of practice back in August of 2008. Almost eight years later, we can conclude that these supplemental rules of practice aren’t working as intended.

Those supplemental rules of practice, among other things, specify timeframes for actions taken after the receipt of a proposal for amending federal orders. Within 30 days of the receipt of a proposal to amend a provision of a federal order, USDA must: issue a notice providing an action plan and expected timeframes for the different steps in the formal rulemaking process for completion of the hearing not more than 120 days after the date of the issuance of the notice; request additional information from the entity submitting the proposal to be used in deciding whether a hearing will be held; or deny the request.

Why are these new rules of practice not working? Back on September 29, 2015, AMS received a proposal from the Organic Trade Association, requesting that USDA call a hearing to consider a proposal that, if adopted, would provide organic milk handlers who make an annual election with an alternative mechanism, based upon the historical “Wichita Option,” for meeting their producer-settlement fund obligations.

AMS responded as it was supposed to under the supplemental rules of practice; 30 days after receiving the OTA’s proposal, it requested additional information from the OTA on several issues.

The OTA responded approximately 30 days later, answering some of AMS’s questions but also noting that “some of your requests fall into the category of information or ‘evidence’ that,” in OTA attorney Chip English’s more than 30 years of experience with federal orders, “would be provided only during a hearing, if one is noticed.”

AMS again responded to the OTA, on December 30, 2015, stating that the response USDA received from OTA on November 30 “was incomplete, and although OTA noted the reasons for its inability to comply fully with the request, USDA must make a thorough examination and is therefore continuing to review and gather information to properly consider the efficacy of the OTA proposal.”

In addition to receiving correspondence from the OTA, AMS has also received some opposition to the hearing request. National Milk Producers Federation, in an October 22, 2015, letter, told Ag Secretary Tom Vilsack that it “strongly opposes” the OTA’s petition for a hearing.

Less than a month later, the Pennsylvania Association of Milk Dealers and the Northeast Dairy Foods Association urged USDA to deny the OTA hearing request. And in mid-December, NMPF reiterated its opposition to the OTA’s petition.

Since the beginning of this year, several dairy cooperatives have also voiced their opposition to the OTA’s proposal. Specifically, Dairy Farmers of America, Agri-Mark, Land O’Lakes, Prairie Farms Dairy, Michigan Milk Producers Association and Upstate Niagara Cooperative have all asked USDA to deny the OTA’s request for a hearing (for what it’s worth, all six co-ops are NMPF members).

Also since the beginning of the year, USDA has, well, USDA hasn’t really done a thing. As noted earlier, just as 2015 was ending, USDA informed Chip English, the OTA’s attorney on this matter, that the OTA’s response to USDA’s initial request for additional information was “incomplete,” and that the agency was therefore continuing to review it.

Since then, AMS has sent four letters to English, each informing him that USDA is continuing to review the concerns raised and the information provided in the OTA’s proposal, as well as gather additional information to evaluate the OTA’s request. Those letters were dated January 28, February 29, April 1 and April 29.

In each of those letters, USDA has also asked the OTA to submit any additional information it may have, so USDA can include that material in its review. Given the OTA’s initial response to USDA’s request for further information, it seems pretty certain that the OTA isn’t going to be submitting any additional information.

Meanwhile, USDA continues with what appears to be stalling tactics. And it also appears that the agency is not following the intent, and certainly not the spirit, of the supplemental rules of practice it adopted back in 2008 to speed up the federal order amendment process.

Under those rules, USDA has three options after receiving a proposal to amend federal orders: issue a notice providing an action plan and expected timeframes for the different steps in the formal rulemaking process; request additional information; or deny the request.

USDA obviously hasn’t issued a notice providing an action plan and expected timeframes, nor has it denied the OTA’s request. Rather, the agency requested additional information from the OTA, and received that information more than five months ago.

USDA’s federal order amendment process remains a model of inefficiency, even with the supplemental rules of practice adopted back in 2008. It’s now been more than seven months since the agency received the OTA’s petition, and essentially nothing has happened.

It’s time for the agency, in the spirit of its supplemental rules of practice, to do something other than just avoid making a decision.

Consequences Of Some Laws Are Felt For Many Years

Laws have consequences. Sometimes these consequences are known pretty quickly, such as in the case of a new farm bill, and sometimes it takes years before the consequences of some laws are fully understood.

We are reminded of this point from time to time in the heavily regulated dairy industry. And we’re not even going to mention (except for right now) the Food Safety Modernization Act, the implementation of which has dragged on through proposed rules, supplemental proposed rules, extended comment periods, at least one lawsuit, final rules, meetings, webinars, staggered compliance dates and more.

Two recent examples have helped to make this point, and also to illustrate just how long the regulatory process can drag on after legislation is passed by Congress and signed into law by the President.

Back in 2010, Congress passed the highly controversial Patient Protection and Affordable Care Act, more commonly known just as the Affordable Care Act or Obamacare. Buried in that law (which has a total of 10 titles, or two less than the 2014 farm bill), in Section 4205 (Title IV is “Prevention of Chronic Diseases and Improving Public Health”) is a requirement for nutrition labeling of standard menu items at chain restaurants.

President Obama signed the Affordable Care Act into law back on March 23, 2010, and last Friday, more than six years after the ACA became law, the US Food and Drug Administration issued final guidance on the menu labeling section of the ACA.

The menu labeling regulation has had a rather lengthy history. FDA initially published a proposed rule on menu labeling back in April of 2011. More than three and one-half years later, on December 1, 2014, the agency published a final menu labeling rule.

FDA received about 900 comments on its proposed menu labeling rule. The final rule includes the agency’s responses to many of these comments.

A couple of numbers can help put the complexity of this process into perspective. First, FDA’s proposed menu labeling rule ran a total of 46 pages in the Federal Register; the final rule more than doubled that, running 105 pages.

Second, the main reason the final rule ran so long was because FDA responded to numerous comments in that final rule. Specifically, FDA’s final rule included the agency’s responses to a total of 155 comments that were submitted in response to the proposed rule.

But that wasn’t the end of it. FDA last Friday published its final industry menu labeling guidance; the draft guidance had been released last September. That final guidance runs some 58 pages.

The agency said it will begin enforcing the menu labeling rule one year after a “Notice of Availability” for the final guidance is published. That’s some seven years and a few weeks after Obama signed the ACA into law.

Also back in 2010, Congress passed something called the Healthy, Hunger-Free Kids Act of 2010. That law was (at least compared to the ACA) relatively short; it only had four titles, and ran all of 84 pages in its final form.

But the dairy industry is still dealing with regulations stemming from the HHFKA. Just last week (as reported on our front page last week), USDA’s Food and Nutrition Service published a final rule that updates the meal pattern requirements for the Child and Adult Care Food Program, as required by the HHFKA.

USDA had published a proposed rule on the CACFP back in January of 2015. The agency received a whopping total of 7,755 comments on that proposal, of which 6,508 were copies of form letters related to 32 different mass mail campaigns. Those comments aside, USDA received over 1,200 unique submissions.

And the final rule included USDA’s response to a number of those comments. Indeed, USDA’s final rule runs some 37 pages in the Federal Register, and over a dozen of those pages are devoted to comments on various aspects of the proposed rule, and USDA’s response to those comments. And none of USDA’s proposals were without controversy (as least as indicated by comments).

For example, USDA’s proposal would have eliminated the option to serve cheese, cottage cheese, or cheese food or spread to infants and would have continued to prohibit serving yogurt to infants. Several entities expressed support for this proposal, but a larger portion of commenters voiced opposition to restricting cow’s milk products for older infants.

USDA’s final rule modified the proposed rule to allow cheese, cottage cheese, and yogurt as allowable meat alternates for infants six through 11 months of age, but the final rule still does not allow the service of cheese foods or cheese spreads under the infant meal pattern.

The HHFKA is further complicated because it requires USDA to update the meal pattern requirements for the CACFP to better align them with the Dietary Guidelines for Americans. The HHFKA was signed into law back in 2010. The 2010 update to the Dietary Guidelines for Americans wasn’t released until January of 2011, and then the 2015 update was released in early January of this year.

Laws like the ACA and the HHFKA require federal agencies to promulgate numerous regulations that have various impacts on the dairy and food industries. And laws sometimes obligate the agencies to use other government edicts in their regulations.

Bottom line: what happens in Washington these days can and will have a future impact on dairy businesses. Watch Congress now and find out what to beware of in, say, the year 2022.

A Hot Summer Could Definitely Heat Up Dairy Prices

One of the more thought-provoking speakers at the annual ADPI/ABI convention in Chicago in recent years hasn’t actually been from the dairy industry. Jon Davis of Riskpulse (not to be confused with the Jon Davis of Davisco, a business unit of Agropur), is a meteorologist by trade, and his talks at the ADPI/ABI meeting are fascinating and obviously a bit different than most other dairy meeting presentations, to say the least.

During his ADPI/ABI presentation on Monday, Davis offered one key takeaway (that was his description): that there’s a “significant” risk of a hot summer in the Lower 48 states this year.

What will that mean for the dairy industry? As Davis pointed out, much of the US dairy industry had an ideal summer last year; weather in the central and eastern parts of the US were very favorable for both animals and for crops.

So what happened? Among some of the leading milk-producing states in those two regions last year, compared to 2014, Wisconsin’s milk production was up 4.4 percent, Michigan’s output was up 6.7 percent, Minnesota’s production was up 3.7 percent, New York’s output was up 2.7 percent, and Pennsylvania’s production was up 1.3 percent.

In short, ideal summer weather meant ideal weather for producing milk. And the only two states among the top 10 milk-producing states to post milk production declines last year, California and New Mexico, are located in the Southwest US.

But Davis said we’re probably heading into a La Nina this year, which raises the risk for a hot summer in the central and eastern regions of the US. And that, we think, could mean higher dairy prices, perhaps much higher prices, before the year is over.

To try to put this into perspective, we went back to 2011, which we seem to recall was a pretty hot summer in the Midwest and elsewhere. Indeed, here’s how USDA’s Dairy Market News began its summary of the fluid milk situation in its report for the week of July 25-29, 2011: “Heat and humidity are the buzzwords across most of the United States this week. High temperatures have stressed cows and production declines of 10% and up are common.”

Oh, and California and the Pacific Northwest were the exception from the hot weather and milk production declines in 2011.

About three weeks later, USDA’s National Ag Statistics Service released its “Milk Production” report for July, and the impact of the hot and humid weather was very clear in some key dairy states, particularly in the Upper Midwest.

Specifically, compared with July of 2010, milk production in July of 2011 looked like this: Wisconsin’s output was down 3.5 percent, with production per cow down 65 pounds (the state actually had 1,000 more milk cows); Minnesota’s output was down 6.6 percent, with production per cow down 115 pounds (Minnesota also had 1,000 more milk cows); and Michigan’s production was down 1.5 percent, with production per cow down 75 pounds (the state had 8,000 more milk cows).

Milk production for the 23 reporting states back in July of 2011 was up 0.8 percent from July of 2010, thanks in large part to some impressive gains in the states not impacted by the heat and humidity. Specifically, compared with July of 2010, California’s July 2011 milk production was up 4.4 percent, Idaho’s output was up 4.8 percent, New Mexico’s production was up 2.4 percent, and Washington’s output was up 6.6 percent.
All four states had both more milk cows and higher output per cow than a year earlier.
And what was the impact of those Upper Midwest milk production declines back in the summer of 2011?

Well, at the beginning of May that year, CME cash market prices for both 40-pound Cheddar blocks and 500-pound barrels were in the mid-$1.60s; specifically, blocks during the first week of May averaged $1.6390 per pound, while barrels averaged $1.6375 per pound.

By the first week of August, the weekly block price average was over $2.14 per pound, while the weekly barrel price average was over $2.13 per pound.

That brings us to 2016, and the potential for hot weather once again for the central and eastern portions of the US. And that’s kind of an eye-opening possibility, for at least one key reason.

As noted earlier, much of the US got hit by hot and humid weather back in the summer of 2011, and had the milk production declines to show for it. But for the US as a whole, milk production was still up, thanks primarily to the key western dairy states.

But at least one of those key western dairy states has been struggling lately. Indeed, the most important US dairy state — California, which produces around 20 percent of all the milk in the US — has posted 15 consecutive monthly milk production declines dating back to the beginning of 2015, and just last month reported a drop of 2.4 percent compared to March of 2015, due both to fewer milk cows and less milk per cow.

Certainly the prospect of lower milk production in the central and eastern regions of the US, along with California’s continuing declines, could have an impact on cheese and other dairy product and milk prices before 2016 is over.

It’s worth noting that cheese prices haven’t been above $2.00 per pound since November of 2014. Also, current settling prices for cheese futures at the CME are under $1.70 per pound for at least another year.

Hot and humid weather in key dairy regions in the US this summer could be one of the biggest things to hit the dairy industry since, well, since hot and humid weather hit key dairy regions in the US back in 2011.

Is California The New Wisconsin?

David Ahlem, president and CEO of Hilmar Cheese Company, made some mighty interesting observations about California’s dairy industry during his opening address at the International Cheese Technology Expo in Milwaukee, WI, last week (for more details, please see the lead story in last week’s issue).

“California still is going to be a large milk producer going forward but the days of significant growth are over,” Ahlem remarked.

While looking over some statistics to put Ahlem’s comments in perspective, something struck us as vaguely familiar. California’s milk production reached 40.7 billion pounds back in 2007, eventually rose to a record high of 42.3 billion pounds in 2014, but fell to 40.9 billion pounds last year, its lowest level since 2010 and just slightly above 2007.

This pattern, or something like it, has indeed been seen before in the dairy industry. It was Wisconsin’s experience for more than two decades.

It should be noted that Wisconsin’s milk production expansion was largely a case of “slow and not all that steady” for several decades. The state’s milk output first topped 15 billion pounds back in 1947, then finally reached 20 billion pounds in 1976, or almost 30 years later. During that period, the state’s milk production actually declined roughly 10 times.

The next 5 billion pounds of milk production came a lot faster for Wisconsin; the state’s milk output reached 25 billion pounds in 1988, or just 12 years after it first reached 20 billion pounds.

And over that period, Wisconsin’s milk production declined just twice: in 1984 and then again in 1986. It may be recalled that two different government programs were operating during those years in an effort to reduce milk production: the milk diversion program (which operated during all of 1984 and into early 1985) paid dairy farmers who reduced marketings by a percentage of a historical base; and the whole-herd buyout program (which was in operation from April of 1986 through September of 1987), under which entire dairy herds were bought and retired.

After reaching a record 25 billion pounds in 1988, Wisconsin’s milk production went into a 21-year funk. It was actually under 23 billion pounds for six consecutive years (1993-98), and twice early in this century came within 100 million pounds of dropping under 22 billion pounds (in 2002, when it totaled 22.074 billion pounds, and again in 2004, when it totaled 22.085 billion pounds).

But then a funny thing happened: Wisconsin’s milk production started to rebound. Indeed, 2004 more or less represented “rock bottom,” and the state’s milk production has increased every year since then.

In 2009, it finally broke the 1988 record, reaching 25.239 billion pounds, and last year, Wisconsin’s milk production topped 29 billion pounds for the first time. If Wisconsin comes close this year to duplicating last year’s increase, 2016 milk production will easily top 30 billion pounds.

That brings us back to California, a state that holds more milk production records than we can even begin to list here. So we’ll focus on just one: the state that was the fastest to grow its milk production by 10 billion pounds.

As noted earlier, Wisconsin’s milk production first topped 20 billion pounds in 1976, and appears likely to finally top 30 billion pounds here in 2016, some 40 years later. And the state’s milk production back in the mid-1920s was over 10 billion pounds, so it took over 50 years for that earlier 10-billion-pound expansion.

And what about California? It was in 1972 that California first reached 10 billion pounds of milk production.
The state’s milk output actually fell slightly twice before the 1970s ended (in 1973 and again in 1978) and then experienced a growth spurt that had never been seen before in the dairy industry (and in all likelihood will never be seen again).

Specifically, California’s milk production grew every year between 1979 and 2008, before finally posting a decline in 2009. During that period, the state’s milk production increases ranged from fairly modest (by just 38 million pounds in 1998) to spectacular (by 2.3 billion pounds in 1994).

During that period, California topped three production milestones, reaching 20 billion pounds in 1990, 30 billion pounds in 1999 and 40 billion pounds in 2007.

But as Hilmar’s David Ahlem noted, California’s days of significant growth “are over.” Indeed, the statistics would seem to indicate that California’s days of significant growth ended almost a decade ago, since the state’s 2015 milk production was just 215 million pounds higher than its 2007 output.

And if the first quarter of 2016 is any indication, California’s milk production this year could fall below 40 billion pounds for the first time since 2009.

So what’s the future look like for California’s dairy industry? As Ahlem noted, California “still is going to be a large milk producer going forward.” If in fact California’s milk production drops below 40 billion pounds this year, and Wisconsin’s rises above 30 billion pounds, it will mark the first time in over a decade that the milk production gap between the two states is less than 10 billion pounds.

Meanwhile, California last year produced over 2.4 billion pounds of cheese and more than 580 million pounds of butter. So this is the “niche” that California will occupy for the foreseeable future: the nation’s leading milk and butter producer (among other products) and the number two cheese producer.

Even without significant growth, California will remain a very significant dairy player, as Wisconsin was during its lengthy “funk.”

Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to dgroves @cheesereporter.com.

Have Federal Orders Really Continued To ‘Evolve’?

While the dairy price support program was relegated to the scrap heap of dairy policy history two years ago, thanks to the 2014 farm bill, the dairy industry is still left operating under one policy relic from the first half of the 20th century: the federal milk marketing order program.

Indeed, here in 2016, the federal order program appears poised to grow significantly in the not-too-distant future. If the proposed California federal order becomes a reality sometime next year, the volume of milk being pooled on federal orders will increase by somewhere around 41 billion pounds annually (California’s 2015 milk production totaled about 40.9 billion pounds).

That would mean that milk marketed through federal orders by 2017 could account for roughly 80 percent of all milk sold in the US (in 2015, about 126 billion pounds of milk was marketed through federal orders, or roughly 60.5 percent of all milk sold in the US; that was down from about 63 percent of all milk sold in 2014, when more than 129 billion pounds of milk was pooled on federal orders).

So the volume of milk pooled on federal orders is poised to grow significantly in the next year or so, while the federal order program continues to plod along, largely unchanged since the turn of the century. And that’s kind of depressing.

We were recently reminded of the unchanging nature of federal orders by comments submitted to USDA by Dairy Farmers of America back in February. In those comments, DFA asked USDA to deny the Organic Trade Association’s request for a modified Wichita option for organic milk.

In its comments, DFA also stated that FMMOs “continue to evolve” with industry changes, and cited as a recent example the reduction in the number of federal orders “as dairy farm size and scale, combined with the consolidation of processor assets, required larger marketing area boundaries to recognize the broader marketplace competition for milk sales and supply regions.”

There are at least a couple of problems with that observation. First of all, the reduction in the number of federal orders isn’t really a recent phenomenon; it occurred back in 2000, when federal order reform resulted in the creation of 11 federal orders (the Western order was terminated in 2004, so there have been 10 orders for more than a decade).

Prior to the consolidation of federal orders under federal order reform, there were 31 federal orders operating in the US, so that consolidation in 2000 was a pretty radical change. Indeed, in the previous 20 years, the number of federal orders declined from 47 in 1980 to 31 in 1999, so the drop to 11 orders in 2000 was a major and sudden change, to say the least.

But we’ve been stuck with the current federal orders (minus the Western order) for more than a decade and a half now. To put this in some historical perspective, back in 1960 there were 80 federal orders; by 1975, there 56 orders, and by 1990 there were 42 orders.

DFA also refers to increases in dairy farm size and scale, and the statistics certainly back that up. But if anything, those increases should have led to further consolidation of federal orders.

Back in 2000, the average daily delivery per dairy producer pooling milk on federal orders was 4,590 pounds; by 2014, that figure had more than doubled, to 9,236 pounds.

Looked at another way, back in 2001, dairy farm operations with more than 500 head accounted for 39 percent of all US milk produced, up from 29 percent in 1997. By 2012 (the most recent year for which we could find statistics), operations with more than 500 head accounted for 63 percent of all milk produced; just farms with 2,000 or more cows accounted for 34.7 percent of all milk produced.

So it would seem that the number of federal orders is due for further reduction, just given the increases in dairy farm size and scale, not to mention all the other industry changes that have taken place since federal order reforms became effective back in 2000.

There’s another example of just how overdue federal orders are for further change. It’s now been over five years since USDA’s Dairy Industry Advisory Committee issued its final report.

That report included two specific recommendations regarding the federal order program (both were supported by all 17 DIAC members). The first was that the secretary of agriculture should appoint a committee to review implications of federal orders; the second was to “strongly consider” the elimination of end product pricing.

More than five years later, nothing has happened as far as those two recommendations are concerned.

One other point worth mentioning here is Class I utilization in federal orders. As the DIAC noted, in the mid-20th century, the percentage of federal order milk used to make fluid milk products was in the range of 60 to 65 percent, but in the 21st century, Class I utilization has been around 40 percent. And over the last three years (2013-15), Class I utilization has been under 33 percent.

Bringing California into the federal order program will reduce that Class I utilization percentage considerably. The DIAC cited the “long-term declines in per capita beverage milk consumption,” along with a number of other developments, that “necessitate a strategic look” at the future role of federal orders, especially in their role in price setting and pooling.

Federal orders haven’t really evolved much since the turn of the century, but the dairy industry, and the marketplace, have changed considerably. It’s time for further evolution, or maybe even some sort of a revolution, in federal order policy. DG

USDA’s Report On Dairy Promotion Programs A Tad Overdue

It’s now been five years since the US Department of Agriculture published a final rule requiring that US dairy importers pay a mandatory assessment of 7.5 cents per hundredweight of milk equivalent on dairy products imported into the US. That final rule also added two importers to the National Dairy Promotion and Research Board.

As we reported on our front page last week, USDA is now proposing to reduce the number of importers on the Dairy Board from two to just one. Comments on this proposal are being accepted until May 2, 2016.
This proposal has us wondering: just how are importers benefitting, or not benefitting, from having to pay this promotion assessment?

It may be recalled that it took two farm bills for the import assessment to be implemented. The 2002 farm bill required that the Dairy Promotion and Research Order be amended to implement a mandatory assessment on dairy imports, with two importers added to the Dairy Board, while the 2008 farm bill specified the mandatory assessment rate of 7.5 cents per hundredweight of milk equivalent on dairy products imported into the US.

Dairy importers have been paying that assessment since August 1, 2011. And now USDA is proposing to reduce their representation on the National Dairy Board from two people on a 38-member board to one person on a 37-member board (the total number of domestic Dairy Board members would remain the same, at 36).

There are at least a couple of different ways to look at whether or not importers are actually benefitting from paying this dairy promotion assessment. First, how have dairy imports fared since the assessment was implemented?

Well, they’ve done okay, as it turns out. The value of US dairy imports has risen from about $2.5 billion in 2011 to a record $3.01 billion last year, an increase of about 22 percent.

But there are several other factors at play here, including, among other things, the strong value of the US dollar, price differences between the US and its competitors, and the fact that leading markets for dairy exports for both the European Union and New Zealand (Russia and China, respectively) have reduced or completely banned those imports.

Another way to attempt to assess the effect of the dairy import assessment is to look at USDA’s annual report to Congress on the dairy promotion programs (the farmer- and importer-funded dairy promotion program as well as the fluid milk processor-funded fluid milk education program). These annual reports usually include a chapter evaluating the effectiveness of the marketing and promotion activities of the Dairy Board and the Fluid Milk Processor Board.

So what does this latest report have to say about the dairy import assessment’s impact? Here’s a brief excerpt from the most recent report: “The overall finding of this evaluation is that the US dairy checkoff programs have effectively increased the supply, demand, prices, and exports of dairy products. The gains in profit at the farm level were far larger than the costs of the checkoff programs.”

There are a couple of points worth noting here. First, there’s no mention, in this very short excerpt, of any sort of benefit for dairy importers. And that holds true for the entire evaluation chapter.

Indeed, the evaluation highlights the benefit-to-cost ratios (BCRs) of the investments made by dairy farmers, dairy importers and dairy processors. The BCR is the dollar value of gains to the checkoff funders from a one-dollar investment in promotion.

The BCRs in terms of producer profit were calculated to be $2.14 for every dollar invested in demand-enhancing activities of fluid milk, $4.26 for every dollar invested in demand-enhancing activities of cheese; and $9.63 for every dollar invested in demand-enhancing activities of butter. The BCR of export promotion is $5.12 per dollar invested.

There is no mention of the BCR in terms of dairy importer profit.

This leads to the other important point worth mentioning: this is the USDA report to Congress covering 2012 program activities. Yes, the report covering 2012 program activities is, here in the fourth month of 2016, the most recent annual report to Congress on the dairy promotion programs.

By way of brief background, as noted in the executive summary of that 2012 annual report, the enabling legislation of the dairy producer (and now also importer) and fluid milk processor promotion programs requires USDA to submit an annual report to the House Agriculture Committee and the Senate Agriculture Committee.

These reports include summaries of the activities for the dairy and fluid milk promotion programs, including an accounting of funds collected and spent; USDA activities; and, as noted earlier, an independent analysis of the effectiveness of the advertising campaigns of the two programs.

Back in the early days of the National Dairy Board, this annual report was released pretty much on schedule; we have printed copies from the late 1980s and early 1990s, dated July 1 (back then, the NDB’s fiscal year started on May 1; more recently, the reports cover calendar years). These reports arrived in our office in Madison before the end of July, back then.

Today, the reports are electronic, and the most recent one available on the website of USDA’s Ag Marketing Service covers 2012.

You’d think at least one of the 45 members of the House Ag Committee or one of the 20 members of the Senate Ag Committee would notice the fact that USDA is three years behind on these reports. And if they don’t care, they should just end the requirement that USDA submit these annual reports. DG

Preparing For The Likelihood Of A Lot More Milk

As we’ve noted in this space before, and undoubtedly will note again, making predictions in the dairy business is never an easy, nor safe, undertaking. The dairy industry has been notoriously unpredictable for years.

Still, we do feel fairly safe in making one prediction: US milk production will continue to grow in the future. And depending on how much and how fast production expands, the US dairy industry is going to have to build quite a bit of additional processing capacity in the next few years.

When we refer to “the future” here, we’re talking about the next decade, or through 2025. In that context, while annual milk production increases are pretty much taken for granted these days (the last time milk production declined was in 2009, and before that was in 2001), increases even over an entire decade haven’t always been guaranteed.

For example, back in the 1960s, US milk production declined from 123.1 billion pounds in 1960 to 116.1 billion pounds in 1969. That was despite the fact that production actually grew to almost 127 billion pounds by 1964, then dropped by almost 11 billion pounds by 1969. It’s difficult to fathom such a drop here in the second decade of the 21st century.

So given the expectation that milk production will continue to grow, just how much additional milk could the US dairy industry be looking at by 2025? Well, according to USDA’s long-term agricultural projections, released back in February, US milk production can be expected to reach 255.3 billion pounds by 2025, or almost 47 billion pounds higher than last year’s record output.

Again to put that in some historical context, USDA’s projection is that US milk production will grow by almost as much between 2015 and 2025 as it did between 1999 and 2015. Looked at another way, a 47-billion pound production increase between last year and 2025 would be about 10 billion pounds greater than the milk production increases during the last decade of the 20th century and the first decade of the 21st century, combined.

There is one huge caveat here. USDA points out that its long-term agricultural projections are not an agency forecast about the future. Instead, the projections are a conditional, long-run scenario about what would be expected to happen under a continuation of current farm legislation and other specific assumptions.

For example, the USDA report assumes that there are no domestic or external shocks that would affect global agricultural supply and demand, and normal weather is assumed.

Hmmm. Looking back over the past decade, the global economy experienced the worst economic crisis since the Great Depression, milk prices and margins in 2009 were at historic lows (which resulted in the milk production decline that year), and then milk, cheese and butter prices all soared to record highs in 2014. Oh, and there was a terrible drought back in 2012.

So domestic and external shocks can pretty much be guaranteed over the next decade, and there’s no such thing as “normal weather.” Other than that, USDA’s projections should be pretty accurate.

One other way to put USDA’s projections in context is to compare them to projections included in the annual baseline published by the University of Missouri’s Food & Agricultural Policy Research Institute. “The world is an uncertain place and commodity markets will continue to be volatile,” FAPRI explains in its report.

As far as milk production is concerned, FAPRI sees US milk output reaching 237.7 billion pounds by 2025, or some 18.5 billion pounds less than USDA is projecting. That’s no small difference.

Still, both USDA and FAPRI have milk production expanding by at least 2 billion pounds per year over the next decade. And that’s a lot of additional milk.

All of that “new” milk begs at least three questions. First, what kind of products will all that milk be made into? One thing that new milk probably won’t end up as is fluid milk; after all, sales of fluid milk have been flat to declining for decades now, and it would be quite surprising if fluid sales suddenly and consistently rebounded over the next decade.

Instead, our guess is that cheese and yogurt production will continue to grow in the future, if for no other reason than because they’ve grown so consistently in recent years.

The answer to the second question helps answer the first: Where will all of this new milk be sold? Certainly at least some of this additional milk will be sold internationally, so perhaps that bodes well for the future of milk powder and whey products production, as well as cheese production.

Third, and perhaps most important, where will all this additional milk be produced? To answer this question, it might be helpful to look at some per capita milk production figures, as compiled by the Central federal milk marketing order market administrator’s office (and detailed in a story on page 51 in this week’s issue).

Per capita milk production tops 600 pounds annually in a total of 19 states (the 600-pound level roughly approximates annual per capita consumption of all dairy products on a milk equivalent basis). Six of those 19 states posted per capita production increases of over 10 percent between 2010 and 2015, including South Dakota, Kansas, Michigan, Utah, Colorado and Indiana. Wisconsin posted a 9.9 percent increase.

If these patterns hold, a pretty significant chunk of additional milk will be coming from the Midwest in the coming years. And processing capacity will be needed for all that additional milk. DG

Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to dgroves @cheesereporter.com.

Time For A Federal Solution On GMO Labeling

In some ways, the issue of GMO (genetically modified organism) labeling is a no-win situation for the food industry. But there is one potential solution that might be less painful than any other approach.

The GMO labeling issue, also known as biotech labeling and GE labeling, among other things, has been garnering a lot of headlines over the past year or so. The US House passed a GMO labeling bill last summer, while the US Senate just last week failed to approve its own version of a GMO labeling bill.

Meanwhile, the state of Vermont a couple of years ago passed its own state GMO labeling law, and that law is scheduled to go into effect on July 1 of this year. That’s just more than three months away.

The GMO issue is a dicey one for the food industry. On the one hand, GMOs have been used in agriculture for a couple of decades or more, and some pretty reputable organizations don’t have any problems with their safety.

Here’s an excerpt from a statement by the AAAS (American Association for the Advancement of Science) board of directors on the labeling of genetically modified foods (dated Oct. 20, 2012):

“The World Health Organization, the American Medical Association, the US National Academy of Sciences, the British Royal Society, and every other respected organization that has examined the evidence has come to the same conclusion: consuming foods containing ingredients derived from GM crops is no riskier than consuming the same foods containing ingredients from crop plants modified by conventional plant improvement techniques.”

On the other hand, if food marketers believe the old adage that “the customer is always right,” well, in this case the customer seems mighty interested in the labeling of foods containing GM ingredients. Or at least they respond that way in surveys.

So far, the legislation approved last year by the House calls for voluntary labeling of foods produced from GM ingredients. That was also the approach used in the bill offered by US Sen. Pat Roberts, the Kansas Republican who chairs the Senate Ag Committee.

But that bill was defeated, meaning that federal GMO labeling legislation faces an uncertain future.

That’s a big problem for the food industry, because, as noted earlier, at least one state, Vermont, has a mandatory GMO labeling law that goes into effect shortly, and several other states are considering similar laws. It’s a potential 50-state nightmare for the food industry.

For such a small state (population under 700,000, according to recent estimates), Vermont appears to be exerting an enormous amount of pressure for mandatory GMO labeling on a national scale.

Just in the past two weeks, four major US food companies have announced plans to label their nationally distributed products with language required by the state of Vermont.

More specifically, to comply with Vermont’s law, as reported on our front page this week, Mars, Incorporated, is introducing on-pack labeling on its products that contain GM ingredients nationwide; and General Mills, Kellogg and ConAgra have also stated their intention to label their products sold nationally to comply with Vermont’s law.

At least three of these companies stressed that they believe GM ingredients are safe. And at least three of the companies called for a federal solution to the problem, saying the possibility of various state regulations would be a nightmare for companies marketing their products nationally.

Back in January, Campbell Soup Company announced its support for federal legislation to establish a single mandatory GMO labeling standard. If federal legislation isn’t enacted, Campbell said it is prepared to label all of its US products for the presence of ingredients that were derived from GMOs, not just those required by Vermont’s law.

Campbell’s January 7, 2016 press release announcing its support for a national GMO labeling standard included an example of a GMO label that was prepared to comply with Vermont’s law. Basically, under the Nutrition Facts and ingredient statement on the back of the product, there’s a statement that reads: “Partially Produced with Genetic Engineering.” It then provides a website (www.whatsinmyfood.com) where consumers can find more information about GM ingredients.

Meanwhile, back on Capitol Hill, while the Roberts voluntary legislation was defeated last week, there’s an alternative bill that might satisfy pretty much everybody. This legislation, the Biotechnology Food Labeling Uniformity Act, was introduced by four Senate Democrats, making its future uncertain in the Republican-controlled Congress.

There are at least three pretty big advantages to that bill. First, it wouldn’t require any sort of warning label or symbol on the front of food packages. Instead, food companies would have to disclose the presence of GM ingredients on the Nutrition Facts panel in one of several ways (this appears to be similar to what Campbell Soup Company is doing).

Second, the bill represents a national solution to this issue. That means that food companies would no longer have to face different regulations in a number of different states, starting with Vermont.
And third, it satisfies at least one influential consumer group, Consumers Union, not to mention one big food company, Campbell.

There is no perfect solution to this controversy, but the Biotechnology Food Labeling Uniformity Act appears to offer several advantages for the food industry, while requiring the disclosure of sought-after information for consumers.


The Potential, And Limits, Of Plant-Based ‘Dairy’ Products

Last week (as we reported in a story on page 19 of last week’s issue), 23 food companies announced the launch of the Plant Based Foods Association, which is described as the first trade group to represent the $3.5 billion plant-based foods sector.

This development has led us to ponder both the potential, and the potential limits, of plant-based versions of foods such as cheese, milk, yogurt, butter and ice cream.

So what’s the potential for these foods? Just for starters, it’s usually a sign of future growth just when a group of companies forms a trade association. The Plant Based Foods Association plans to educate the public about the benefits of moving toward a plant-based diet, and advocate for policies that encourage shifting toward a plant-based diet, both of which should help grow the industry in the future.

As far as actual sales are concerned, as noted above, the plant-based foods sector is currently a $3.5 billion “niche,” and growing. The association itself uses the phrase “fast-growing” to describe the plant-based foods sector, and there’s no doubt some truth to that, given that many of the association’s charter members didn’t exist at the turn of the century.

It’s also notable that the association says plant-based milks, at $2.1 billion, are driving the category’s growth, having enjoyed 14.4 percent growth in total sales volume over the last two years. Considering what fluid milk sales have been doing in recent decades (declining in bad years, stable in good years), the sales growth for plant-based milks is pretty impressive.

The association also describes the plant-based foods sector as an industry that “supports consumer health and the environment,” and we have no doubt that those are two areas that will drive growth of these foods in the future.

As far as consumer health is concerned, estimates vary, but in all likelihood there are several million consumers in the US who consider themselves vegans (and 310 million or more who don’t).

Why do consumers go vegan? According to The Vegan Society, there are three key reasons: preventing the exploitation of animals, for the health benefits, and for the environment.

Looking more closely at each of those reasons, regarding animal welfare, it’s probably safe to say that the number of consumers who consider themselves vegans increases every time there’s a story about alleged animal abuse on a dairy farm. Such stories don’t occur all that often, but they don’t have to, to prompt more consumers to question their consumption of dairy products.

The health benefits angle sort of depends on your perspective. The butter industry suffered for decades as everybody from the federal government to health organizations touted the benefits of margarine (the main ingredient of which is partially hydrogenated vegetable oil) over butter.

Now the pendulum is swinging back, and indeed it’s difficult if not impossible to find anybody with anything positive to say about stick margarine. And there’s a fair amount of research about the health benefits of milkfat in the diet, as well as the detrimental impacts of eliminating milkfat from the diet.

As far as environmental benefits of plant-based foods are concerned, we’re not really convinced that these products are actually better for the environment than animal-based foods. For example, Melt Organic’s spreads contain coconut oil sourced from Sri Lanka and palm fruit oil sourced from Colombia.
It’s hard to believe that this product is more sustainably produced than butter is.

Speaking of ingredients, the lengthy list of ingredients in some of these plant-based dairy alternatives would appear to be one of factors that will limit their growth in the future. Survey after survey has found that consumers are looking for “simple” foods, that is, foods with short ingredient lists and ingredients that they can actually pronounce. But at least some of these plant based dairy alternatives are pretty much the complete opposite of what these consumers are seeking.

For example, Medium Cheddar Style Farmhouse Block from Daiya Foods contains, among its roughly 17 ingredients, such things as tapioca starch, pea protein isolate, xanthan gum, tricalcium phosphate, tricalcium citrate and pea starch. Meanwhile, regular medium Cheddar contains milk, cheese cultures, salt, enzymes and possibly annatto; or maybe just milk, salt and enzymes (depending on the brand).

One of dairy’s simplest products, half and half, contains only milk and cream, but Dairy-Free Creamer from Nutpods contains not only coconut cream and almonds but also acacia gum, gellan gum, sunflower lecithin and dipotassium phosphate.

Interestingly, many of these plant based dairy alternatives tout what they’re free from: the aforementioned Dairy-Free Creamer from Nutpods, for example, is free from dairy, soy, gluten, carrageenan, high-fructose corn syrup, refined sugars and sugar alcohols. But it still includes nine ingredients, which is seven more than dairy half and half.

One other factor potentially limiting the growth of plant based dairy alternatives is taste. Maybe the sum of these products is greater than the parts, but most of them don’t exactly conjure up thoughts of gourmet, specialty or even average. They simply sound unappetizing, although anything is possible given today’s scientific advances.

Plant-based foods now have their own trade association, which is usually a sign of future growth. Time will tell what sort of growth these foods have, given both their perceived benefits as well as their very real shortcomings. DG

A Tale Of Two Cheese Industries

This week, the World Championship Cheese Contest took place in Madison, WI. Some 2,959 contest entries from around the world competed to be the “best of the best.”

It was a great showcase for the tremendous variety of high-quality cheese, butter and yogurt products available today to consumers worldwide.

Meanwhile, since the beginning of this year, lawsuits have been filed from coast to coast alleging shortcomings in cheese quality. And just in the past couple of weeks, several cheese companies and/or their owners/officers have pleaded guilty to charges related to food adulteration and/or misbranding.

These legal proceedings have provided a depressing showcase for some of the shady shenanigans that, sadly, have been going on in the cheese and dairy industries since at least the 19th century.

To briefly review several cheese quality-related lawsuits and/or legal settlements that have occurred just since the beginning of this year: a lawsuit filed in US District Court in California alleges that the “Mozzarella Sticks” being sold by McDonald’s are “adulterated and misbranded”; separate lawsuits filed in New York and California allege Parmesan cheese deception by Wal-Mart Stores, Inc., and Kraft Heinz Foods Company; two cheese companies and a cheese company executive pleaded guilty to charges relating to their introduction of adulterated and misbranded cheese products into interstate commerce; and Delaware-based Roos Foods, Inc., a manufacturer of ready-to-eat cheeses, pleaded guilty to a charge of food adulteration.

While each of these cases is different in many ways, they all have one thing in common: they have all brought some negative publicity to the cheese industry. And while there’s an old observation about how there’s no such thing as bad publicity, well, for the cheese industry in 2016, that’s highly debatable and easily refutable.

It should be noted that the recently filed lawsuits alleging cheese quality problems are part of a larger trend in the food business. That is, more and more consumers (and/or their lawyers) are taking more and more food companies to court over various alleged food-related offenses.

Indeed, according to a 2013 study by the US Chamber Institute for Legal Reform, courts are “seeing an unprecedented surge in consumer class actions against food manufacturers.” The authors of that study identified nearly 150 food class actions filed since 2011.

That point aside, these recent lawsuits and settlements remind us that the cheese industry has been battling quality-related problems for almost as long as there has been a formal, organized cheese industry in the US.

Evidence of that point can be found in the First Annual Report of the State Dairy and Food Commissioner, published way back in 1890 (the “State” is Wisconsin). We thought it worthwhile to reprint a small section of that report here:

“Sixty million pounds of cheese is annually made in this state. There is not an article of commerce that requires greater skill in handling in order to secure favorable markets. No industry has been so perverted.
No business exists that has been so basely manipulated, and no article of food has been so degraded by counterfeiters. In no time has the honest manufacturer met with such dishonest competition. Matters have come to such a pass that the genuine article is under the ban of suspicion at home and abroad. The result has been that the subject has been thoroughly investigated by importers and steps have been taken to reduce the exportation of filled cheese from the United States.”

Just a bit of background on that report: the Wisconsin legislature, in 1889, passed a bill creating the office of Dairy and Food Commissioner for the state. That bill stated that it was to be the duty of the commissioner to enforce all laws (both in existence at that time or that may have been enacted thereafter in the state) regarding the production, manufacture or sale of dairy products, or the adulteration of any article of food or drink.

So some 126 years after that report was published, there are still numerous alleged and real cheese quality problems cropping up. Why is that?

Here’s an interesting observation from that 1890 report that still rings true today: “The clamor of our people for cheaper food, for cheaper wear and for cheaper everything has had a pernicious result upon the purity of articles offered for sale by our tradesmen. The people ask for low-priced foods and in many cases the merchants are unable to supply the demand with an honest article, and fraud is resorted to. The merchants, in turn, must have the goods that are called for and the manufacturer is drawn into the gap and makes the spurious article.”

In short: blame the consumer (among others). More than a few of them want cheap food (or can’t afford anything but cheap food) and at least a few companies are willing to cut some corners to provide those cheap products.

Unfortunately, at least some of the time (such as here in early 2016), a few alleged or real problems end up giving the entire industry a black eye.

This week, at the Monona Terrace Convention Center in Madison (just a couple of blocks from the State Capitol, where that 1889 legislation was passed), judges from around the world evaluated cheeses from around the world to determine the winner of the biennial World Championship Cheese Contest. This event generated an unbelievable amount of favorable publicity for the cheese industry.

And with a US-produced cheese winning the contest for the first time in 28 years, all the negative publicity generated earlier this year has been swept away, for now.


A Billion Pounds Of Cheese, In A Month

It’s happened three times now: in December of 2014, in December of 2015 and now in January of 2016, the US has produced more than 1 billion pounds of cheese.

Yes, you read that correctly: the US has now produced more than a billion pounds of cheese in a single month. Three times.

This remarkable production milestone prompts some research about past cheese production milestones, as well as some thoughts about what might be expected in the future.

It was way back in 1942 that the US first produced a billion pounds of cheese in an entire year. That milestone was achieved some 17 years after the US first produced half a billion pounds of cheese in a single year.

Unlike in recent years, when cheese production seems to set new records every single year (it hasn’t declined since 1991), cheese production experienced a lot more ups and downs back in the “good old days.”

After reaching a record 501.1 million pounds in 1925 (at least it appears to be a record; the cheese production figures on the website of USDA’s National Ag Statistics Service only go back to 1919), cheese production fell below the half-billion-pound mark for four straight years, topped that mark in 1930, then fell below it again the following two years.

As noted above, it wasn’t until 1942 that the US finally produced a billion pounds of cheese in a single year. And the following year ended up being the last time the US didn’t produce at least a billion pounds of cheese in a single year.

After reaching 1 billion pounds in 1942, it took almost three decades for cheese production to reach the 2-billion-pound level. That was achieved in 1970, when output totaled 2.2 billion pounds.

Billion-pound barriers fell more quickly after that. US cheese production first topped 3 billion pounds in 1976 (at 3.3 billion pounds), first topped 4 billion pounds in 1981 (at 4.3 billion pounds), and first surpassed 5 billion pounds in 1985 (at 5.1 billion pounds).

After achieving additional milestones in 1990 (topping 6 billion pounds), 1996 (7 billion pounds), 2000 (8 billion pounds), and 2005 (9 billion pounds), US cheese production reached the astonishing 10-billion-pound mark for the first time in 2009. And the 11-billion-pound mark was reached in 2013.

One other related milestone: the US first produced half a billion pounds of cheese in a single month back in May of 1989.

In addition to total cheese production, the US also produces well over a billion pounds, annually, of two different cheese varieties. US Cheddar production first topped the billion-pound mark back in 1961.

To put that in perspective, Cheddar back in 1961 accounted for about 62.5 percent of total cheese production; last year, when Cheddar output totaled 3.35 billion pounds, it accounted for around 28.6 percent of US cheese production.

Mozzarella production first topped a billion pounds back in 1985, and last year reached 3.97 billion pounds.

Finally on the historical front, when it comes to cheese production, two states belong to the billion-pound club: Wisconsin, which first produced over a billion pounds of cheese back in 1972 and last year (pending the release of final figures in a couple of months) produced over 3 billion pounds of cheese for the first time; and California, which first produced over a billion pounds of cheese in 1996 and last year produced about 2.4 billion pounds of cheese.

With that bit of history in mind, what does the future hold for US cheese production? For starters, in 2016 and beyond, we’ll see cheese production top a billion pounds a month more and more frequently.

Last year, in addition to topping 1 billion pounds in December, US cheese production topped 990 million pounds in March, July, October and November. Cheese production in July can be pretty unpredictable (depending at least in part on how hot and humid the weather is), but it’s probably a safe bet that the US will produce more than a billion pounds of cheese in March, May, October and November this year, in addition to January and December.

It might not be until 2020, however, that cheese production exceeds a billion pounds every single month. That’s due to the simple fact that February will have 28 days in each of the next three years, and won’t have 29 days again until 2020.

Meanwhile, the US already produces more than a billion pounds annually of one cheese category in addition to Mozzarella and Cheddar: other American-type cheeses, production of which reached almost 1.3 billion pounds in 2014. Because NASS lumps both Monterey Jack and Colby into this category, there’s no way of knowing if production of either variety even approaches a billion pounds.

The US did produce around 851 million pounds of Cream and Neufchatel cheese in 2014, so it’s possible that production of these cheeses could top a billion pounds annually in the next several years. Otherwise, the US doesn’t produce even half a billion pounds of any single cheese variety.

At the state level, Idaho appears poised to become the third state to join the billion-pound-a-year club. Last year, Idaho produced around 941 million pounds, so possibly in 2016 or maybe in 2017 Idaho should produce over a billion pounds of cheese.

No matter how you slice it, a billion pounds is a lot of cheese, whether it’s the production of a single state or production of a single variety.

When the US starts producing a billion pounds of cheese in a single month, well, that’s a pretty remarkable achievement. DG


‘Commercial’ Disappearance Has Become Obsolete

Two weeks ago, on our front page, we reported 2015 figures for commercial disappearance of several dairy products as well as for milk in all products.

And while researching and writing up that story, we realized that the term “commercial,” as used in conjunction with disappearance, has become obsolete in today’s dairy industry.

USDA’s Economic Research Service (ERS) actually uses the term “commercial” in five different columns in its disappearance tables: for beginning commercial stocks, domestic commercial disappearance, commercial exports, total commercial disappearance, and ending commercial stocks.

ERS defines total commercial disappearance as the total commercial supply (which in turn is defined as beginning commercial stocks plus production plus imports) minus net government removals minus commercial ending stocks. And domestic commercial disappearance equals total commercial disappearance minus commercial exports.

The “obsolete” nature of the term “commercial” actually lies in the “net government removals” category. In short, there’s no longer such a thing as “net government removals” because, well, because the government has been “removed” from helping dairy products “disappear.”

There are a couple of points worth noting here, both having to do with government policies. And those policies were the Dairy Product Price Support Program and the Dairy Export Incentive Program.

It may be recalled that, two years ago this month, both of those programs were terminated when President Obama signed the 2014 farm bill into law. And so there will be no more USDA net removals in the future.

Prior to those two programs being terminated, there had actually been no USDA net removals for several years. “USDA net removals” is defined as price support purchases plus DEIP exports minus unrestricted sales of stocks held by USDA’s Commodity Credit Corporation (CCC).

So USDA net removals can be either positive or negative, and in fact were both in 2010, the last year there any removals by the agency. More specifically, in 2010 there were positive net removals of cheese and butter but negative net removals of nonfat dry milk.

And then there was nothing in 2011, 2012 and 2013, which turned out to be the final three years of both the price support program and the DEIP.

Both of these programs had a long history both of operating and of impacting dairy product disappearance. The dairy price support program was initially established by the 1949 farm bill, and arguably had its “glory years” (at least as measured by the size of CCC purchases of surplus dairy products) back in the 1980s.

The Dairy Export Incentive Program is considerably younger than the price support program, having been established by the 1985 farm bill.

The impact of these programs can be seen in looking over historical ERS statistics for commercial disappearance and net government removals.

On a milk equivalent milkfat basis, milk equivalent skim solids basis, and on a product-by-product basis, USDA removals peaked in 1983. That year (which, as noted earlier, was before the DEIP was established and so included only price support purchases), the CCC purchased about 833 million pounds of American cheese, 413 million pounds of butter and 1.06 billion pounds of nonfat dry milk.

That accounted for 12.4 percent of total marketings on a milk equivalent milkfat basis, and 15 percent of total marketings on a milk equivalent skim solids basis, ERS figures show. On a milk equivalent milkfat basis, government removals that year amounted to almost 17 billion pounds; on a milk equivalent skim solids basis, government removals totaled around 20.6 billion pounds.

Back in that era, US dairy product ending stocks also took on a different look than what the dairy industry has grown accustomed to here in the second decade of the 21st century. At the end of 1983, for example, commercial stocks included 368 million pounds of American cheese, 105 million pounds of other cheese, 36 million pounds of butter, 75 million pounds of nonfat dry milk and 47 million pounds of canned milk. That was about 5.1 billion pounds on a milk equivalent milkfat basis and 5.7 billion pounds on a skim solids basis.

By comparison, government stocks at the end of 1983 included 793 million pounds of American cheese, 464 million pounds of butter, and 1.3 billion pounds of nonfat dry milk. That was 17.7 billion pounds on a milk equivalent milkfat basis and 23.3 billion pounds on a skim solids basis.

Needless to say, there were more government-owned dairy product stocks at the end of 1983 than there were commercial dairy stocks. Today, of course, there are no government-owned dairy product stocks, either at the end of the year or at any other time. Nor are there any USDA net removals. It’s all “commercial,” so there’s no need to refer to it as “commercial” any longer.

There is one caveat to all of this discussion about “commercial” disappearance. That is, the 2014 farm bill created the Dairy Product Donation Program (DPDP), under which USDA would buy dairy products when the margin falls below a certain level, and will distribute those products to individuals in low-income groups through public and private non-profit organizations. Those would likely be considered USDA net removals.

But for now, using the term “commercial” when discussing disappearance, stocks or exports seems completely unnecessary. DG

Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to dgroves @cheesereporter.com.

US Becoming A Dumping Ground For World’s Dairy Surpluses

For a number of years now, US dairy trade statistics held mostly positive news: exports were growing impressively, imports were growing just slightly if at all, and the US was becoming a more important player on the world market.

But the final dairy trade statistics for 2015 (and some January 2016 import figures) appear to contain more bad news than good news. The most obvious number is for US dairy exports, which in 2015 were valued at $5.24 billion, down 26 percent, or almost $1.9 billion, from 2014’s record high.

But at least some of that is because prices were so much lower in 2015 than they were in 2014. Just to cite one example: the US exported a record volume of nonfat dry milk and skim milk powder last year — 1.234 billion pounds, to be exact — but the value of those NDM and SMP exports, at about $1.4 billion, was down 34 percent, or $715 million, from 2014.

While the US dairy export figures for 2015 are disturbing, what’s more alarming are the dairy import figures. For starters, as reported on our front page last week, US dairy imports in 2015 were valued at a record $3.012 billion.

Yes, that was up just 1 percent from 2014, but keep in mind, as noted above, that commodity prices in 2015 were considerably lower than they were in 2014. So, for example, the value of US cheese imports last year, $1.292 billion, was up just 1 percent from 2014, but the volume of US cheese imports last year, 435.3 million pounds, was up 20 percent from 2014 and the highest level since 2006.

But it could be argued that this cheese import increase isn’t all that significant, since domestic commercial disappearance of cheese in 2015 reached a record high of 11.241 billion pounds. Back in 2006, the last time US cheese imports topped 400 million pounds, domestic commercial disappearance of cheese totaled 9.684 billion pounds, so imports that year accounted for a larger percentage of domestic disappearance than they did in 2015.

Still, there are a few somewhat disturbing figures in the 2015 cheese import statistics. For example, New Zealand is once again one of the leading sources of US cheese imports; last year, the US imported 32.8 million pounds of cheese from New Zealand, up more than 16 million pounds from 2014 and up more than 30 million pounds from 2013.

Notably, US cheese imports from New Zealand last year, while up impressively from recent years, still pale in comparison to 2002, when the US imported about 100 million pounds of cheese from New Zealand. In fact, from 1998 through 2007, US cheese imports from New Zealand never fell below 58 million pounds. In that context, last year’s cheese imports from New Zealand seem pretty insignificant.

But these aren’t exactly specialty cheeses that the US is importing from New Zealand; they’re largely commodity cheeses, including Cheddar.

It’s also notable that, in January, licensed US cheese imports totaled 19 million pounds, up 88 percent from 2015. Some 5.9 million pounds of that cheese came from New Zealand, including over 3 million pounds of Cheddar.

Meanwhile, the US imported more than 25 million pounds of cheese from Lithuania last year, up almost 20 million pounds from 2014, up more than 22 million pounds from 2013 and the highest level of US cheese imports from Lithuania since 2002, when those imports totaled 28.9 million pounds. The majority of the cheese being imported from Lithuania is Goya, a hard grating cheese that likely displaces such US-
produced cheeses as Parmesan, Romano and Asiago.

The US is also importing quite a bit of butter these days, from countries ranging from Ireland to New Zealand. The US ran a butter trade deficit of about 6 million pounds last year, after running butter trade surpluses of more than 100 million pounds in both 2013 and 2014.

So why is the US such an attractive market these days for imported dairy products from areas such as New Zealand and the European Union? There appear to be two key reasons.

First, both New Zealand and the EU are facing difficulties in some of their key export markets. For example, back in August of 2014, Russia banned the importation of dairy products from the EU.

How important is that Russian import ban for the European Union? According to a 2014 European Commission report, cheese exports to Russia accounted for close to one-third of EU total cheese exports.
US cheese imports from the EU in 2015, the first full year of Russia’s import ban, totaled 311.2 million pounds, up 18 percent, or 47.1 million pounds, from 2014.

That same 2014 European Commission report noted that close to 25 percent of EU butter exports went to Russia, and that two-thirds of these exports originated from Finland and France. Coincidentally, US butter imports from France rose from 1.9 million pounds in 2013 to 8.6 million pounds last year.

As far as New Zealand is concerned, China is New Zealand’s leading export market, but China has reduced its purchases lately, so New Zealand’s exports are ending up in other markets. And the US is one of those “other markets.”

A second factor boosting US dairy imports and hampering dairy exports is the value of the US dollar, which hurts US competitiveness and helps other dairy exporters.

Neither of these factors will likely change anytime soon, meaning the US will continue to be, to some extent, a dumping ground for the world’s dairy surpluses. And that will make it more difficult for domestic manufacturers to protect their home turf. DG

Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to dgroves @cheesereporter.com.


Letter to the Editor

Response To ‘California Discount’ Letter
by Rob Vandenheuvel
General Manager
Milk Producers Council

published Februray 12, 2016

A response to last week’s “open letter” written by Rachel Kaldor, Executive Director of the Dairy Institute of California, entitled, “A Total Myth: ‘The California Discount’” (Feb. 5, 2016):

Rachel Kaldor proclaims the “California Discount” is a myth? Let’s call a spade a spade; the Dairy Institute of California is in the business of advocating for their processor clients. Ms. Kaldor’s job is to preserve the advantage her California processors have received, in the form of a regulated discount in the minimum milk prices they pay. Our job, as California producers, is to call them on it and smoke out the steer manure.

The “California Discount” is a running tally of the devastating financial impact on California dairy farms of having a State Milk Marketing Order that establishes a monthly minimum price for milk sold to cheese plants (Class 4b) significantly below the Federal Order Class III price. That tally is up to $1,951,728,890 since 2010, AND COUNTING!

We’ve been fighting this battle for years, but last Fall a wonderful thing happened.
We had an opportunity – in the context of a USDA hearing on a California Federal Order – to ask pointed questions of Dairy Institute witnesses under oath about some of the rhetoric we’ve heard over the years.

Check out the excerpts below from testimony given by two large cheese manufacturers with operations in both California and Federal Order areas: Saputo Cheese Company and Leprino Foods. (The full transcripts from this hearing can be found at: https://www.ams.usda.gov/rulesregulations/ moa/dairy/ca/transcripts.)
October 22, 2015

Question by Marvin Beshore, Counsel for the California Dairies, Inc., Dairy Farmers of America and Land
O’Lakes: “Do you know what your average cost of milk in [Saputo Cheese Company’s] Wisconsin plants is?”

Answer by Greg Dryer, Senior Vice President, Saputo Cheese Company: “Well, it is higher. Definitely higher than the minimum [Class III] price.”

October 29, 2015
Question by Mr. Beshore: “So I just want to talk about [Leprino Food Company’s six] non- California plants, briefly. Those are all nonpool plants, correct?
Answer by Sue Taylor, Vice President, Leprino Foods: “Correct.”

Beshore: “And while they are nonpool plants, the contracts are based on Federal Order prices, are they not?”

Taylor: “Yes.”

Beshore: “Without getting going any further than this, they are at least minimum class prices, federally, correct?”

Taylor: “We are also from time to time offered milk at below Federal Order minimums by that supplying cooperative.”

Beshore: “Okay. So the average price paid by your plants on, you know, throughout the year, year-to-year, is at least Federal Order minimum price, is it not?”

Taylor: “Yes, it is.”

Let’s get this straight: In sworn testimony, two of the nation’s largest cheese manufacturers had to admit that whether or not they buy occasional spot loads of milk at distressed prices, the average price they pay for all the milk their plants (outside of California) need is at or above the Federal Order minimum price!
Seems like the “myth” that has been “debunked” by the “facts” is Ms. Kaldor’s myth that a California Discount doesn’t even exist!

The sad reality is that the Dairy Institute has been completely shortsighted in their insatiable thirst for cheap milk. They have completely missed the fact that their demand for a steep California Discount is actually killing the golden goose of milk production in the State.

Dairy farming is no longer the prized agricultural activity in California, with milk production dropping year-over-year and modern dairy facilities being plowed over to grow almonds, pistachios or other tree crops. The Dairy Institute has believed that California dairies will produce the milk they need no matter the price; that arrogant position is being proven wrong in front of their own eyes.

So what’s the bottom line? Ms. Kaldor and her clients clearly know that their days of the California Discount are numbered, and they are desperately clinging to every opportunity to preserve it however they can and for as long as possible. California producers have united in a way that’s unprecedented in supporting a unified proposal for a California Federal Order that will finally establish a level playing field in California. Enough is enough; the California Discount must end once and for all.


Rob Vandenheuvel
General Manager
Milk Producers Council
Ontario, California


About The California Discount

If nothing else, last week’s letter from Rachel Kaldor and this week’s response from Rob Vandenheuvel illustrate just how controversial current milk pricing policy is in California.

The current controversy is due in large part to the dry whey factor in the California 4b and federal order Class III formulas, which makes us wonder if it’s time to re-examine the use of product price formulas in both the federal order program and in California.

There is no perfect milk pricing policy, but the controversies surrounding product price formulas over the past 16-plus years — controversies ranging from make allowances to the use of dry whey prices — tells us that maybe it’s time to try a different approach to pricing milk. DG

Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to dgroves @cheesereporter.com.


Letter to the Editor

A Total Myth: ‘The California Discount’
by Rachel Kaldor, Executive Director
Dairy Institute of California

published Februray 5, 2016

An open letter from the Dairy Institute of California:

California dairy farmers have been sold a bill of goods. They’ve been told that since they aren’t getting the Class III price, they’re being cheated. But it’s a myth, a total myth.

This fiction has gotten in the way of any reasonable discussion about dairy pricing in California. It has become all or nothing. Unless California farmers get the Class III price, they’re completely dissatisfied.

Here are the facts that completely debunk the myth:
• In no existing federal milk marketing order does USDA require all cheese makers to pay the Class III price. So the claim that California dairy farmers should get paid what Wisconsin farmers get paid deserves closer scrutiny.

• Today, Wisconsin spot milk sales are happening at between $4.00 and $8.00 UNDER Class III. That is never part of the “California Discount” story. California processors, however, never pay less than the Class 4b price.

• California’s binding minimum price regulations limit competition across manufacturers and that has led to adequate supply, limiting market pressure for increased premiums.

• Wisconsin has many specialty, value-added cheese plants, which generate more revenue than commodity products. California’s largely commodity cheese plants were built to accommodate our large milk volume; those commodity products generate lower revenue.

• Wisconsin cheese plants are nearly half a continent closer to our domestic market. California is the most distant dairy region from domestic cheese markets. It costs money to move product to market.
These facts add up to the real story.

Let’s look at a federal order that has large commodity cheese plants, with a normally ample supply of milk, but closer to domestic markets than California: New Mexico. What’s the most recent mailbox price paid to farmers in that Federal Order? For October 2015, in New Mexico — a federal order with the same rules as Wisconsin but with a dairy industry structured a lot like California — the price was $15.55. But the price paid to dairy farmers in California was $15.82.

That is the real story. It’s not the California discount. It’s the California difference — one state’s unique industry structure compared to another’s.

“The California Discount” makes an easy target of our state’s industry. It deliberately distracts from the real work needed to make our industry successful in changing markets; domestic and now global. And it’s simply a myth. A total myth.


Rachel Kaldor
Executive Director
Dairy Institute of California
Sacramento, CA

About The California Discount

Thank you to Rachel Kaldor for contributing the Letter to the Editor on the California Discount.

By way of brief background, the “California Discount” to which Kaldor refers represents the difference between the California Class 4b (cheesemilk) price and the federal order Class III price.

Historically, the gap between these prices has always been significant. What has drawn criticism from dairy producer organizations in recent years is the fact that the dry whey price has a far greater positive impact on the federal order Class III price than it does on the California Class 4b price.

So, according to California’s Milk Producers Council, high dry whey prices over the 2010-2014 period resulted in a “California Discount” of nearly $2 billion.

And the California producer community has been trying to reduce the size of the “California Discount” for several years now. As Karen Ross, secretary of the California Department of Food and Agriculture, noted in October of 2013, since 2011, the CDFA has held six hearings and denied five hearing requests; and in the last 10 years, it has held a total of 18 hearings and denied a total of 12.

This was of course before the CDFA held a hearing in June of 2015, the result of which was a one-year increase in the whey factor in the Class 4b price formula from August 1, 2015, through July 31, 2016.

As Ross noted in that October 22, 2013 letter to dairy industry stakeholders, testimony submitted at a September 2013 hearing supported the CDFA’s position “that the manufactured milk pricing formulas need to be changed to equitably return value to producers and recognize that only a few processors are realizing the full value of whey.

“California’s 1960’s system of regulated milk pricing is outdated and impairs the ability of the dairy industry to meet 21st century challenges and opportunities in national and international markets,” Ross added.

Unfortunately (at least in our opinion), the “solution” now being pursued in California is a throwback to the Depression era; USDA held a lengthy hearing last fall on establishing a federal milk marketing order for the state of California.

Certainly, that’s one way for California producers to receive the Class III price (or close to it). But it doesn’t seem to be a long-term answer to milk pricing issues either in California or nationally. DG

Still Plenty Of Opportunities In US Dairy Market

On the surface, the US dairy market is not exactly a rapidly growing market. This slow rate of growth was put into perspective at this week’s Dairy Forum 2016 in Phoenix, AZ, by Paul Carbonneau and Ludovic Meilhac of McKinsey & Company.

The US aggregate dairy consumption growth rate is just 0.8 percent per year, Carbonneau pointed out, compared to growth rates of 6.6 percent annually in China and 5.1 percent in India. That’s one reason why a number of US companies are aggressively pursuing export markets.

But while that 0.8 percent growth rate doesn’t seem very impressive, it doesn’t mean there’s little to no room for growth in the US dairy market.

Keep in mind, first of all, that the small growth rate includes declining fluid milk sales and consumption. Take the fluid milk business out of the equation and the growth rate becomes at least somewhat better.

And when you examine various dairy categories more closely, you begin to see that there truly are many, many opportunities for growth. For example, while Meilhac noted that commodity cheese now faces many headwinds, the specialty cheese segment of the cheese business appears to be growing quite impressively.

Just in Wisconsin, for example (which accounts for about a quarter of total US cheese production), specialty cheese production has grown from 83 million pounds in 1993 to about 660 million pounds in 2014. Some 91 of Wisconsin’s 127 cheese plants see opportunity in the specialty cheese segment.

And this opportunity is being seen by cheese makers from coast to coast, as evidenced simply by looking at the growth in what might be called non-traditional categories in various cheese contests. Indeed, just the sheer number of classes in contests such as the US and World Championship Cheese Contests and the American Cheese Society’s annual competition illustrates how many people see opportunity in the specialty cheese business.

And it’s always worth remembering that annual per capita cheese consumption in the US still trails some European countries by 10 to 20 pounds or more.

Then there’s the yogurt business. At the turn of the century, about the only consumers who had heard of Greek yogurt lived in Greece. Since then, US yogurt production has risen from about 1.8 billion pounds to almost 4.8 billion pounds, in part (or large part) because of Greek yogurt.

Yogurt output was basically flat during the first 11 months of 2015 (compared to a year earlier), so perhaps growth in the yogurt market has about run out of steam, but frankly we doubt it. As yogurt companies expand into such niche markets as Icelandic-style yogurts, and introduce so-called “better-for-you” yogurt products with less added sugar and shorter ingredient lists (among other things), well, 2015 might end up being just a bump in the road in yogurt’s phenomenal growth story.

Then there’s butter. Back in the late 1990s, it looked like US butter production might drop below 1 billion pounds. Butter output in 1997 totaled 1.15 billion pounds, down more than 200 million pounds from 1992.
Things were looking pretty bleak for butter.

Well, if there was an underlying “theme” at this week’s Dairy Forum, it was that “Butter is Back.” That point was mentioned by more than one speaker, and the statistics back up the point.

US butter production never did fall below a billion pounds; instead, it slowly increased (and sometimes decreased) to 1.6 billion pounds in 2008, fell slightly for a couple of years, then jumped to over 1.8 billion pounds in 2011 and has remained above that level ever since.

But that doesn’t tell the whole story about the growing US butter market. US butter imports roughly tripled just from 2010 through 2014 (from 8.1 to 24.2 million pounds), and were on pace through November to top 40 million pounds in 2015.

Meanwhile, US butter exports have dropped from around 178 million pounds in 2013 to probably under 40 million pounds in 2015. Thus, while US butter production has been relatively flat since 2012 (at around 1.86 billion pounds), falling exports and rising imports indicate that the US butter market is growing.

And within the butter category, there are certainly niche markets that appear to be doing quite well, including European-style butters with higher fat contents (Ireland, the home of Kerrygold butter, is currently the leading source of US butter imports) and grass-fed butter (again, a niche being filled by Kerrygold, among others).

Finally, we can’t help but touch on the beleaguered fluid milk business. The well-known decline in fluid milk sales was mentioned at the Dairy Forum about as often as butter’s comeback, but it’s worth remembering that all is not lost when it comes to milk as a beverage (and keep in mind that beverage milk remains a 50-billion-pound “niche” market).

For one thing, as we reported last September (in our Sept. 11 issue, to be exact), the number of fluid milk plants increased from 388 in 2011 to 414 in 2013, even as average plant volume declined, an indication that some relatively small bottling plants are successfully tapping into demand for locally produced foods.

And for another thing, while they might not exactly fit the definition of “fluid milk,” products like fairlife and Core Power are demonstrating that many consumers will pay extra for value-added beverage milk products.

Yes, the US dairy market as a whole is growing slowly, but there are niches within that market that are growing impressively. The opportunities are almost endless.

Maybe Lower Retail Prices Would Boost Fluid Milk Sales

Sometime later this year, USDA’s Economic Research Service will likely report that US beverage milk sales in 2015 totaled less than 50 billion pounds (beverage milk sales include whole, 2 percent, 1 percent, and skim milk, along with flavored whole and other milk and buttermilk).

This seems like a fairly safe prediction because, first of all, beverage milk sales in 2014 were, at 50.659 billion pounds, down almost 1.6 billion pounds from 2013; and second, through the first 10 months of 2015, fluid milk sales were down 1.5 percent from the first 10 months of 2014.

Obviously there are many reasons why fluid milk sales are declining, or at least not increasing (according to ERS figures, beverage milk sales over the past four decades reached a high of 55.426 billion pounds in the year 2000), but we’d like to focus on just one of those factors: retail milk prices.

How important are retail milk prices in overall milk sales? Here’s an excerpt from one of USDA’s recent annual reports to Congress on the dairy and fluid milk promotion programs:

“From 1995 through 2006, annual average fluid milk prices rose 23.6 percent relative to other beverages.
These retail fluid milk price increases are likely responsible for some of the decline in per capita fluid milk consumption.”

So what happened with retail fluid milk prices last year? Well, the good news is that those prices were lower than they were in 2014. According to prices collected monthly by federal milk marketing order market administrators, retail whole milk prices last year averaged $3.61 per gallon, down from $3.84 per gallon in 2014.

That seems like kind of a high price average for whole milk prices, when taking into account the fact that the federal order Class I base price averaged $16.34 per hundredweight last year after averaging a record $23.29 per hundred in 2014.

Indeed, at $16.34 per hundred, the Class I base price last year averaged its lowest since 2010, when it averaged $15.35 per hundred. And retail whole milk prices back in 2010? They averaged $3.24 per gallon.

A year later, when the Class I base price averaged a then-record $19.13 per hundred, retail whole milk prices averaged $3.57 per gallon, four cents less than they averaged last year.

Frankly, it seems like fluid milk sales might fare a bit better if retail prices better reflected federal order minimum prices.

But that’s not even the most frustrating part of this retail price problem. For their price series, federal order market administrators survey one outlet of the largest and second largest food store chains and the largest convenience store chain in a total of 29 cities or metro areas in federal order markets.

Obviously, there’s considerable variation in average retail milk prices between the cities and metro areas surveyed by the market administrators. In 2015, consumers in Cincinnati, OH, and Houston, TX, could consider themselves lucky; retail whole milk prices in those cities averaged $2.85 per gallon and $2.83 per gallon, respectively.

On the other hand, it was a bummer being a milk drinker in Milwaukee, WI, last year, where retail whole milk prices averaged $4.25 per gallon. The same can be said about milk drinkers in Kansas City, MO, where retail whole milk prices averaged $4.23 per gallon.

Isn’t that interesting? Milwaukee had the most expensive whole milk among the 29 cities and metro areas surveyed by market administrators, yet Milwaukee sits in one of the biggest milksheds in the US.

More milk is pooled on the Upper Midwest order, where Milwaukee is located, than any other federal order. And Kansas City is located in the Central federal order, which ranks fourth among the 10 federal orders in volume of producer milk, trailing the Upper Midwest, Northeast and Mideast (at least in 2014).

It’s astonishing to see that, in 2015, retail whole milk prices averaged higher in Milwaukee and Kansas City than in, for example, New Orleans (where they averaged $4.08 per gallon), which is located in Louisiana, which has one of the largest milk deficits among all 50 states.

Another interesting aspect of these high retail milk prices in cities located in milk surplus regions is that these high prices haven’t always been the case, at least in some instances. Back in 2006, for example, retail whole milk prices averaged $3.20 per gallon in federal order markets, and averaged $3.80 per gallon in Milwaukee, but only $3.22 per gallon in Kansas City. Obviously milk prices have gotten a bit out of whack in Kansas City over the last decade.

Perhaps what’s needed in cities like Milwaukee and Kansas City is more retail competition. Related to that point, a new study by agricultural economists Vardges Hovhannisyan and Marin Bozic found that “grocery retail concentration had a positive statistically significant effect on retail dairy product prices.” (For more details, please see the story on our front page.)

Specifically, a 10 percent increase in concentration was found to lead to a 0.46 percent rise in retail dairy product prices.

Will more competition bring about lower milk prices? Who knows? The world of retail milk prices is a complex world, impacted by everything from farm milk prices to processing costs and retailer pricing practices.

But it seems reasonable to expect that lower retail milk prices would boost sales. Notably, fluid milk sales in the Upper Midwest order were down 3.2 percent during the first 10 months of 2015, the largest drop among all 10 orders.

Maybe more competition would mean lower prices and higher sales.

Some Possible Dairy Milestones In 2016

No doubt 2016 will bring many surprises for the dairy industry, but there are also a few things that can be reasonably expected in this new year. Some of these things are based on what happened in 2015 or earlier.

For example, from a price standpoint, 2015 was noteworthy for its relative lack of volatility and relatively “moderate” price levels. For one thing, the CME 40-pound Cheddar block market didn’t reach the $2.00 per pound level for the first time since 2010. Also for the first time since 2010, the federal order Class III price didn’t rise above $17.00 per hundredweight nor fall below $14.00 per hundred.

So our expectation for 2016 is more price volatility than was experienced in 2015. The last time the CME block price failed to reach $2.00 per pound for two consecutive years was in 2009-2010, so we wouldn’t be surprised to see blocks reach that level at some point (probably later in 2016 as opposed to earlier). And given where the block market ended 2015, that would mean that the range between the high and low for the block market in 2016 would be considerably wider than the range in 2015.

Our expectation for milk prices in 2016 is similar. In 2015, the Class III price ranged from a low of $14.44 per hundred to a high of $16.72 per hundred, or a difference of just $2.28. In 2016, we might see both lower lows (maybe $14.00 per hundred or lower) and higher highs (maybe above $18.00 per hundred) than we saw in 2015.

Speaking of milk prices, 2015 saw something that many long-time industry observers thought they’d never see: the California dairy industry petition USDA to establish a California federal order.

That happened early in 2015, and was followed by, among other things, an opportunity for others to submit proposals, a few informational meetings, a hearing notice, and finally a hearing that lasted for a total of 40 days.

So can we expect a new California federal order before the end of 2016? No. USDA recently outlined the next steps in the California federal order process, and under that process, transcript corrections are due on January 15, post-hearing briefs are due March 31, and reply briefs are due May 16.

After reply briefs are submitted, USDA will develop and issue a recommended decision based on the evidence presented during the rulemaking. The agency will then request comments on that recommended decision, analyze those comments, and issue a final decision.

So in short, at the end of 2016, California will still be operating under its state milk order, but it will be closer than it is today to getting its very own federal order.

Speaking of California, it will be mighty interesting to watch what happens in the nation’s largest milk-producing state in 2016. As noted in this space last week, California’s milk production in 2015 was down in every month compared to a year earlier, and the state continues to grapple with a horrendous drought.

Will 2016 bring more production declines in California? Or will the state’s extremely resilient dairy industry turn things around in 2016? We shall see.

Last year was a very busy year for the US Food and Drug Administration, and we fully expect 2016 to also be very busy for FDA. For one thing, the agency is required to issue two more final Food Safety Modernization Act rules in 2016, one covering the sanitary transport of food and feed, the other covering intentional contamination.

Also, FDA in recent years has undertaken a number of proposed rulemakings, some of which could result in final rules being released in 2016.

For example, back in March of 2014, FDA released two proposed rules to update the Nutrition Facts label. One of those proposals dealt with the appearance and content of the Nutrition Facts panel itself, while the other proposal dealt with serving sizes. In 2015, FDA issued a supplemental proposed rule on revising the Nutrition Facts panel.

This has been a pretty significant undertaking for FDA, as evidenced just by the fact that the agency received almost 800 comments on its proposal to update the Nutrition Facts panel and over 100 comments on its proposal to update serving sizes.

It’s certainly possible that FDA will publish final rules to revise the Nutrition Facts panel and serving sizes sometime in 2016.

FDA in 2015 also sought comments on reducing the risk of raw milk cheese. The agency received roughly 50 comments from around the world.

Can we expect some sort of proposed FDA rule regarding raw milk cheese in 2016? That’s doubtful. After all, FDA has been reviewing its raw milk cheese policy since the late 1990s. It doesn’t seem likely that the agency would propose any changes to that policy so soon after the period for submitting comments on reducing the risk of raw milk cheese ended.

On the trade front, possibly the biggest story in 2016 will be the ongoing Transatlantic Trade and Investment Partnership negotiations between the US and the European Union. Just as one of 2015’s biggest trade stories was the completion of the Trans-Pacific Partnership agreement, perhaps one of 2016’s biggest trade stories will be the completion of the TTIP. Or maybe not.

But neither the recently concluded TPP nor the TTIP will bring about actual policy changes in 2016. The TPP still has to be ratified before it can take effect, and the ratification process will take a fair amount of time in 2016. And of course the TTIP hasn’t yet been completed, let alone ratified.

Combining these few “knowns” with all of the unknowns, we can all stay tuned for a dairy interesting 2016. DG

A Look Back At Some 2015 Dairy Developments

The year 2015 is rapidly coming to an end, so there’s no better time to look back at some of the more interesting happenings this year, from a dairy industry perspective.

Compared to 2014, 2015 could perhaps best be described as kind of boring. Last year, after all, featured, among other things, a new farm bill that terminated the longstanding dairy price support program, Dairy Export Incentive Program and Milk Income Loss Contract program; record-high prices for cheese, butter, and milk; and new record highs for both dairy exports and imports.

And 2015? Well, we did see a new butter price record set, but otherwise on the price front, things were pretty average. Through the first 11 months of 2015, the CME 40-pound Cheddar block price averaged around $1.6250 per pound, which will end up being the lowest block price average since 2010 but a few cents above the 2000-14 average.

Meanwhile, the federal order Class III price is on pace to average somewhere around $15.80 per hundredweight, down about $6.50 from 2014’s record high but almost a dollar above the 2000-14 average.

On the congressional front, things were pretty quiet this year, with the issue of GMO labeling perhaps garnering the most attention but not being resolved by the end of 2015 (the House passed a bill back in July but the Senate hasn’t addressed the issue yet).

Things were a bit busier this year on the regulatory front. Specifically, the US Food and Drug Administration has been generating headlines like perhaps never before. Some of those headlines concerned implementation of the landmark Food Safety Modernization Act, which was signed into law almost five years ago.

Back in September, FDA published its long-awaited preventive controls final rule, which requires, among other things, that food companies establish and implement hazard analysis and risk-based preventive controls, and modernizes FDA’s current good manufacturing practices regulations.

About a month later, FDA released a couple of additional final rules required under the FSMA: the foreign supplier verification program and the program for accreditation of third-party certification bodies to conduct food safety audits. Implementation of these final rules will keep the dairy industry busy for several years.

FDA also made some progress, sort of, on its raw milk cheese regulations. Back in late July, the agency sought comments on reducing the risk of raw milk cheese. This might, eventually, lead to FDA bringing its raw milk cheese regulations into the 21st century.

On the trade front, US dairy exports will end the year down by somewhere around $1.8 billion from 2014’s record level of $7.1 billion, while US dairy imports will probably end up topping $3 billion for the first time ever.

But arguably the biggest dairy trade story this year was the conclusion of the Trans-Pacific Partnership agreement, which includes not only the US but also such dairy export giants as New Zealand and Australia and such significant dairy importers as Japan and Mexico.

The jury’s still out on the net impact of the TPP agreement; about the only conclusion that seems safe at this time is that it’s the most significant dairy trade agreement since the Uruguay Round agreement more than 20 years ago.

On the domestic front, 2015 could be remembered as the “Year of California,” for at least a couple of reasons. Of course, every year in the dairy industry could be remembered as the “Year of California,” simply because California accounts for over 20 percent of total US milk production and is also the leading producer of butter and nonfat dry milk, among other products.

But 2015 will be more memorable than usual from a California dairy perspective, for at least a couple of reasons. First, the year was less than a month and a half old when the three largest dairy cooperatives in California petitioned USDA to hold a hearing to consider establishing a federal order for California.

About seven months and lots of rigamarole later, the historic California federal order hearing got underway, running for a total of 40 days. Obviously, 2015 will end with California still operating under its own state milk order, but just the fact that the process has gotten this far is historically significant.

The other major development in California in 2015 has been the state’s falling production. Compared to 2014, the state’s milk production has been down every month thus far in 2015, and through 11 months California’s milk output is down about 1.3 billion pounds from a year earlier.

That volume of milk is about what the state of Missouri produced in 2014.

Milk production declines in California have obviously meant declines in the production of various dairy products. Through October, California’s cheese production was only down 0.3 percent from a year earlier (thanks to output being higher in six of the first seven months of 2015), but cheese production in August, September and October was down 3.2 percent, 2.9 percent, and 4.9 percent, respectively, from those same months in 2014.

Meanwhile, California’s butter production through October was down 5.9 percent from a year earlier, while yogurt output was down almost 14 percent and production of whey protein concentrates and isolates was down almost 30 percent.

All in all, 2015 has provided lots of interesting developments in the dairy business, although if nothing else it made us appreciate, even more how memorable 2014 really was. DG


Revisiting An Ongoing Problem With Product Price Formulas

Product price formulas have been a formal part of US milk pricing for more than two decades now, ever since USDA issued a final rule, for all federal orders in operation at the time, that implemented the base month Minnesota-Wisconsin (M-W) price updated with a butter/powder/cheese formula as the replacement for the old M-W price series.

And product price formulas have been generating controversy in the dairy industry for, well, for more than two decades now. These controversies have focused on issues ranging from the use of National Cheese Exchange prices 20 years ago to the use of dry whey prices in recent years.

One aspect of product price formulas that has been generating controversy for more than a decade now is make allowances. Indeed, it was just over a decade ago, in September of 2005, when Agri-Mark requested that USDA hold an emergency hearing to, among other things (and primarily) update the make allowances for cheese, dry whey, butter and nonfat dry milk.

At that time, federal order make allowances for cheese, butter, nonfat dry milk and dry whey were 16.5 cents per pound, 11.5 cents per pound, 14.0 cents per pound and 15.9 cents per pound, respectively. Agri-Mark’s emergency hearing request noted, among other things, that California’s make allowances were higher for all four of those products.

Make allowances were increased twice in the aftermath of Agri-Mark’s emergency hearing request (hearings were held in early 2006 and then reconvened later that year). First, USDA bumped up the make allowance for cheese (among other changes) from 16.5 cents per pound to 16.82 cents per pound, and then raised that make allowance to 20.03 cents per pound (among other changes).

The current federal order make allowance for cheese has been 20.03 cents per pound since October 1, 2008. In its tentative partial final decision that set the cheese make allowance at that level, USDA explained that the California Department of Food and Agriculture’s 2006 survey of average cheese manufacturing costs “is the best available information representing the manufacturing cost of producing a pound of cheddar cheese.”

Accordingly, USDA proposed for adoption a make allowance for Cheddar cheese of 20.03 cents per pound, including a .15-cent per pound marketing cost adjustment. That meant the CDFA’s average Cheddar manufacturing cost for 2006 was 19.88 cents per pound.

Since 2006, California’s Cheddar cheese manufacturing cost has gone both up (reaching 20.99 cents per pound in 2008) and down (reaching 19.21 cents per pound in 2010), but has now risen four straight years, including new record highs for three straight years.

As reported on our front page last week, California’s average cost of manufacturing Cheddar cheese last year was a record 23.55 cents per pound, up from 22.91 cents per pound in 2013. And therein lie at least two problems with product price formulas.

First, as noted earlier, the federal order make allowance for cheese in the Class III formula has been 20.03 cents per pound for more than seven years, and that make allowance, when established back in 2008, was based solely on CDFA cost data.

That CDFA cost data shows that the average cost of manufacturing Cheddar cheese is now more than 3.5 cents per pound higher than it was back in 2006. And that CDFA cost data has shown for three years now that the average cost of manufacturing Cheddar cheese is at least 1.68 cents higher than the federal order make allowance for cheese.

Interestingly, during the initial federal order make allowance hearing in January of 2006, Agri-Mark’s Bob Wellington proposed that USDA increase the cheese make allowance from the 16.5 cents per pound then in effect to 18.1 cents per pound, an increase of 1.6 cents per pound.

If USDA were to convene a new hearing on make allowances, it would seem appropriate to propose something along the lines of a 3.5-cent increase in the make allowance for cheese.

Another problem with product price formulas revealed by the CDFA’s latest cost surveys is that the CDFA is now only able to collect and summarize manufacturing cost data from four California cheese plants. The volume total (which includes both Cheddar and Monterey Jack cheeses, but couldn’t be published due to confidentiality reasons) reflected only 40-pound Cheddar blocks, although two plants processed 500-pound barrels or 640-pound blocks.

Back in 2006, the CDFA’s survey included seven cheese plants that processed a total of 826.8 million pounds of cheese (Cheddar and Monterey Jack), representing 98 percent of the Cheddar and Monterey Jack produced in California that year.

Last year, California produced 375.8 million pounds of Cheddar cheese, and Cheddar accounted for 15.4 percent of the state’s total cheese output. Back in 2006, Cheddar accounted for 22.5 percent of the state’s cheese output.

The point is, both in California and nationally, the cheesemilk price is based on the price of a commodity (Cheddar) that’s becoming less important in the category as a whole (cheese). US Cheddar output last year accounted for 28.5 percent of total cheese production, down from 33.4 percent 10 years ago.
More than two decades of experience indicates that there are numerous problems with product price formulas. With that experience in mind, perhaps it’s time for another round of federal order reform.

The Goat Milk Boom

Some recent, and not-so-recent, news items have led us to reach the following conclusion: the goat milk business, both in the US and globally, is definitely a growth market, now and in the years ahead.

This isn’t necessarily an easy conclusion to reach, for the simple reason that “official” statistics on the goat milk industry are pretty limited.

Indeed, USDA’s National Agricultural Statistics Service offers only one report that includes statistics pertaining to goat milk. The agency’s annual Sheep and Goats report, released early every year, includes information about milk goat inventory, both for the US as a whole and for various states and regions.

So what does that report show? According to the report released back in January, there were 365,000 milk goats in the US as of January 1, 2015, 7,000 head more than a year earlier.

Digging a little deeper into the NASS statistics, we find that the US milk goat inventory has risen from 300,000 head as of January 1, 2005, to 365,000 head as of January 1, 2015.

That’s notable, because we weren’t able to find any statistics on milk goat inventory prior to 2005. NASS has only been tracking the inventory of milk goats for about a decade now.

Beyond the statistics, there are a couple of additional indicators of the health and vitality, not to mention growth prospects, of the goat milk industry in the US.

First, there are at least a couple of companies that have made significant acquisitions of goat milk businesses recently. Just last week (as reported on page 9 of December 4 issue), Switzerland’s Emmi announced that it has acquired Redwood Hill Farm & Creamery in Sebastapol, CA.

Redwood Hill has a turnover of more than $22 million per year, and produces artisan goat milk cheese, yogurt, and kefir. According to Emmi, the Redwood Hill Farms Plain Goat Milk Yogurt in one-liter cups is the country’s biggest-selling large yogurt distributed via the US natural food channel.

The Redwood Hill acquisition isn’t Emmi’s first acquisition of a US goat milk products pioneer. Several years ago, Emmi acquired California-based Cypress Grove Chevre.

In short, Emmi’s recent acquisition history indicates that the company sees solid potential for goat milk cheeses and other goat milk products in the US.

Meanwhile, Canada’s Saputo announced back in October that it had acquired the companies forming Woolwich Dairy, which generates annual revenues of about $70 million and produces, distributes, markets and sells goat cheese in Canada and the US.

Woolwich itself illustrates the growth taking place in the US goat milk business, having been founded in Canada back in 1983 and then opening a plant in Lancaster, WI, in 2008.

Like Emmi, Saputo certainly seems to see the potential for growth in the goat milk cheese business. And why not? After all, the combined sales of Redwood Hill and Woolwich are more than $90 million (although Woolwich has a longer and stronger presence, and presumably greater sales, in Canada than in the US).

The second indicator of the health and vitality of the goat milk industry in the US can be seen in the number of classes and entries for goat milk cheeses in various cheese contests.

Just to cite one example, less than 25 years ago, the biennial United States Championship Cheese Contest didn’t have a single class for goat milk cheese. Six years later, when a goat milk cheese captured the top prize in that contest, there were two classes for goat milk cheese: one for fresh goat’s milk cheese and the other for aged/cured goat’s milk cheese. The two classes together drew fewer than two dozen entries.

The US Championship Cheese Contest held back in March had a total of seven categories for goat’s milk cheeses, plus three classes for mixed milk cheeses (for blended cow, goat, sheep and/or buffalo milks). The seven goat’s milk cheese categories attracted approximately 135 entries.

One interesting aspect of the growth in the number of goat milk cheese classes and entries in the US Championship Cheese Contest is that several companies that have long produced only cow’s milk cheeses have now ventured into producing goat’s milk cheeses (not to mention mixed milk cheeses).
These companies include, among others, Marin French Cheese, Sartori Company, Hook’s Cheese Company and Carr Valley Cheese.

Without going into specifics, it’s safe to say that most if not all other US cheese and dairy product contests have expanded the number of goat milk cheese classes in recent years, and have seen a rising number of entries as a result.

Not only are US cheese contests attracting a growing number of goat cheese makers, international competitions are also attracting more and more US goat cheese makers. The latest and perhaps best example of this is the 2015 World Cheese Awards, results of which were reported in a front-page story in last week’s issue.

The US did quite well in that contest, capturing a total of eight Super Golds (a total of 62 Super Golds were awarded). Amazingly, four of the eight Super Golds earned by US cheese makers were for goat’s milk cheeses; these included Midnight Moon from Cypress Grove Chevre, Smoked Billy Blue from Carr Valley Cheese, Chaumine from Goldin Artisan Goat Cheese, and Miette from Baetje Farms.

It’s never easy, or safe, making predictions in the dairy business, but it looks like a pretty safe bet to predict that the future of the US goat milk industry is extremely bright. DG

Comprehensive Food Label Update An Intriguing Idea, But...

A couple of weeks ago, four Democratic members of Congress introduced legislation that would address food labeling reform in what sponsors call a comprehensive manner.

That’s an intriguing idea, but the bill as introduced has far too many flaws to deserve support from the food industry — or consumers, for that matter.

As reported in last week’s issue (please see page 3), two Democrats in the House and two Democrats in the Senate introduced a bill called the Food Labeling Modernization Act of 2015.

It should be noted, first of all, that the legislation has absolutely no chance of being approved by either house of Congress, for the simple reason that it was introduced by Democrats only and both the House and Senate are controlled by Republicans.

Similar legislation was introduced in both the House and the Senate two years ago and went absolutely nowhere, despite the fact that the Senate at that time was controlled by Democrats.

While it has absolutely no chance of advancing, there are at least three positives in this food labeling legislation. For one thing, it’s been about a quarter of a century since Congress passed the Nutrition Labeling and Education Act of 1990, and the Nutrition Facts panel has been mandatory on most packaged foods for more than 20 years. That alone means an update isn’t such a bad idea.

Second, this legislation is pretty comprehensive, addressing such issues as the Nutrition Facts panel, the ingredients statement, and front-of-package labeling. The US Food and Drug Administration has been working on an update to the Nutrition Facts panel for almost two years now, and because this update is going to happen sooner or later, why not take a look at other aspects of food labels as well?

And third, the bills require that the formatting for the ingredient labels on foods be improved for the purposes of readability (i.e., the size of lettering, contrast of lettering, bolding, bullet points, etc.). As the US population continues to age (the oldest baby boomers hit 70 in a few short weeks), ingredient statements become harder and harder to read; larger typeface wouldn’t be such a bad idea.

Still, there are more negatives than positives in this legislation. For one thing, it requires FDA to promulgate a final rule relating to the use of the term “natural,” taking into consideration consumer surveys and studies.

We addressed the complex issue of trying to define “natural” in this space two weeks ago, after FDA announced that it was seeking input on whether and how it should define “natural.” We recommended that FDA continue its current approach on the use of the term “natural,” but the bills introduced in Congress two weeks ago would force FDA to define “natural.” That’s just not a good idea.

The bills also require FDA to clarify the definition and usage of the term “healthy.” The clarifications deal with whole grains and added sugar, but what FDA should really do is stop regulating the use of “healthy” altogether, for the same reason it shouldn’t try to define the term “natural”: there’s simply no way to actually come up with an accurate, useful and not misleading definition of the term.

That’s especially true given how much our knowledge of nutrition and health has changed over the past two or three decades. For example, for many years there was a general belief that foods containing high levels of dietary cholesterol were “unhealthy.”

But the 2015 Dietary Guidelines Advisory Committee, in its report released earlier this year, concluded that dietary cholesterol is “not a nutrient of concern.”

In other words, what’s considered “healthy” or “unhealthy” today might be considered just the opposite in a few years. And by the time any final FDA labeling regulations take effect, the 2020 Dietary Guidelines Advisory Committee will be undertaking its report, which will undoubtedly be different than the 2015 DGAC’s report.

The bills also address front-of-package labeling, and not in a good way. Basically, the legislation requires FDA to promulgate regulations regarding the summary nutrition information required on the front of food packages, and the labeling is required to be a single, simple, standard system that is easily seen and understood and displays caloric information related to a common serving size and information related to nutrients strongly associated with public health concerns.

There are at least two huge problems with this. First, as noted in the cholesterol example cited earlier, the nutrients strongly associated with public health concerns keep changing; that is, what was considered a public health concern back in, say, 1990 might not be a concern today.

And second, food labels have focused on nutrients of concern, such as fat, cholesterol and sodium, for over two decades, with dismal results. If FDA mandates front-of-package labeling, it should focus on nutrient density, or on the positive attributes of foods (such as being good sources of calcium, protein, potassium, magnesium, phosphorus, etc.), rather than on so-called negative attributes.

Yes, food labels are arguably in need of an overhaul, not just the Nutrition Facts panel but also pretty much every other aspect of the labels. And yes, it would be nice to do this all at once, so that just one label changeover would be required, rather than several.

But the legislation introduced in Congress last month isn’t the right approach. So it’s probably a good thing that only Democrats are behind the bills.

Maybe what’s really needed is some sort of bipartisan approach to updating food labels. DG

The Hunger Problem Persists

It’s that season again: the season of holidays, parties, and general over-indulgence.

But not for everyone. The fact is that hunger remains a persistent problem in the US, not to mention around the world, despite the fact that millions of Americans will in all likelihood gain a pound or three between now and early 2016.

We’d like to make a couple of points here. First, just how big is the hunger problem?

According to a recent report from USDA’s Economic Research Service, in 2014, 86 percent of US households were food secure throughout the year, while the remaining 14 percent (17.4 million households) were food insecure. Food-insecure households (those with low and very low food security) had difficulty at some time during 2014 providing enough food for all their members due to a lack of resources.

Further, in 2014, 5.6 percent of US households (6.9 million households) had very low food security, ERS reported. In this more severe range of food insecurity, the food intake of some household members was reduced and normal eating patterns were disrupted at times due to limited resources.

Children (also known as “the future”) were food insecure at times during 2014 in 9.4 percent of US households with children (3.7 million households). These households were unable at times during the year to provide adequate, nutritious food for their children.

What about globally? According to the latest edition of the annual United Nations hunger report, the number of hungry people in the world has dropped to 795 million (216 million fewer than in 1990-92).

In the developing regions, the prevalence of undernourishment — which measures the proportion of people who are unable to consume enough food for an active and healthy life — has declined to 12.9 percent of the population, down from 23.3 percent a quarter of a century ago, according to “The State of Food Insecurity in the World 2015,” published earlier this year by the UN’s Food and Agriculture Organization, the International Fund for Agricultural Development, and the World Food Program.

These hunger statistics prompt a couple of thoughts. First, in the US, it seems that obesity garners a majority of the food-related headlines, but hunger poses a significant problem as well, one that arguably deserves more attention than it currently receives.

And globally, we’ve been hearing for a number of years now that agriculture is going to have to gear up to feed 9 billion people by the year 2050. That’s even more challenging than it might seem, considering that we’re not even adequately feeding all of the current population.

Our second point here concerns how people can help reduce the hunger problem, both in the US and worldwide. We’re frankly not optimistic that the hunger problem will ever be totally eliminated, but at least, as recent trends indicate, the problem can be reduced.

In the US, Feeding America (formerly Second Harvest) is the largest hunger-relief organization, a network of 200 food banks across the country. Feeding America feeds 46 million people at risk of hunger, including 12 million children and 7 million seniors.

There are at least three ways to support Feeding America. First, Feeding America accepts monetary donations, and says that, for every dollar donated, the Feeding America network of food banks secures and distributes 11 meals to people facing hunger.

Also, Feeding America accepts food donations. The organization bills itself as a leading waste diversion partner across the food supply chain, partnering with top industry groups and companies in the retail, manufacturing, and produce spaces. This is significant, considering that, according to the federal government, food loss and waste in the US accounts for approximately 31 percent of the overall food supply available to retailers and consumers.

Finally, Feeding America and the National Dairy Council last year launched the Great American Milk Drive, which aims to get people to donate milk to hungry families. More information is available at https://milklife.com/give. And more information about Feeding America (which provides liability protection and tax benefits for its corporate partners) is available at www.feedingamerica.org.

Feeding America is the largest US hunger-relief organization, but it’s not the only one. Among the others: Share Our Strength (more information is available at www.nokidhungry.org).

Internationally, there are numerous organizations devoted to reducing hunger. One of these organizations, Heifer International (www.heifer.org), provides livestock, trees, seeds and training in environmentally sound agriculture to families in 30 countries, including the US, to help families and communities become more self-reliant.

Another organization that works internationally is Stop Hunger Now (www.stophungernow.org), which gets food and life-saving aid to the world’s most vulnerable people, and works to end global hunger. And Action Against Hunger’s (www.actionagainsthunger.org) programs are designed to bolster agricultural production, jumpstart local market activity, support micro-enterprise initiatives, and otherwise enhance a vulnerable community’s access to sustainable sources of food and income.

There are many, many other organizations, too numerous to list here, that are also devoted to trying to end, or at least reduce, global hunger.

Many of us will overindulge during this holiday season; there are numerous ways to help those who won’t have that opportunity.

FDA Should Not Try To Define ‘Natural’ For Food Labels

origianally appeared in the 11/20/15

The US Food and Drug Administration last week announced that it is interested in receiving comments on the use of the term “natural” on food labels. Among other things, the agency wants input into whether it should define the term “natural,” or prohibit the use of the term on food labels.

What FDA should actually do on this issue is nothing. That is, it should neither define the term “natural” nor ban its use. In this case, it should leave things alone.

As reported on our front page last week, FDA said it is seeking comments on the use of the term “natural” in part because it has received three petitions asking that the agency define the term “natural” for use in food labeling, and one petition asking that the agency prohibit the use of the term “natural” on labels.

Two of the petitions asking FDA to define the term “natural” illustrate how difficult this undertaking is. Both Sara Lee Corp. and The Sugar Association basically want FDA to adopt a unified policy with other government agencies regarding the use of the term “natural.”

FDA explained that the use of “natural claims” in the USDA-FSIS Food Standards and Labeling Policy Book states, in relevant part, that the term “natural” may be used on labeling for meat and poultry products if the applicant for such labeling demonstrates that: the product does not contain any artificial flavor or flavoring, coloring ingredient, chemical preservative, or any other artif icial or synthetic ingredient; and the product and its ingredients are not more than minimally processed.

Of course, nothing is ever simple when it comes to defining terms such as “natural,” so the FSIS policy book goes on to explain that minimal processing may include traditional processes used to make food edible or to make it safe for human consumption (we can see where this would cause some interesting discussions over whether milk that’s been pasteurized has been “minimally processed”), or physical processes which do not fundamentally alter the raw product and/or which only separate a whole, intact food into component parts.

We can’t even begin to imagine how this might work when applied to whey products. After all, products such as whey protein isolate and lactoferrin are “component parts” of milk, but it seems that milk needs to be more than “minimally processed” in order to produce those products.

A third petition, from the Grocery Manufacturers Association, asks FDA to issue a regulation authorizing statements such as “natural” on foods that are or contain foods derived from biotechnology.

In its petition, GMA notes that, for over 20 years, FDA “has not wavered in its position that foods derived from biotechnology, as a class, are just as safe as their traditionally bred counterparts.” And based on FDA’s own analysis and findings concerning plants derived from biotechnology, “it follows that a statement of ‘natural’ or a similar statement would be neither false nor misleading on a food derived from such technology solely because of its heritage,” GMA added.

As far as foods derived from biotechnology are concerned, it should be kept in mind that, back in July, the US House of Representatives passed a bill on GMO labeling, but the Senate has yet to act on any such measure. FDA is specifically seeking input on whether the term “natural” should include such production practices as genetic engineering.

It would seem that FDA can’t make a final determination on the use of the term “natural” at least until Congress passes some sort of GMO labeling bill (especially since the House bill requires FDA to define the term “natural”).

Based on all the questions that FDA is seeking input on, it would appear that trying to define the term “natural” will be next to impossible for the agency. So the petition from Consumers Union, requesting that FDA ban the use of the term “natural” on food labels altogether, is intriguing.

Consumers Union states in its petition that, according to a survey it conducted in April of 2014, a majority of US consumers are misled by the “natural” label, and almost 90 percent expect it to mean much more than it does. So Consumers Union wants FDA to issue an interpretive rule stating that the term “natural” is “vague and misleading and should not be used.”

While we agree with Consumers Union’s point that the term “natural” is “vague and misleading,” we don’t think an outright ban on its use is practical, or even constitutional (thanks to the First Amendment). If nothing else, how would a ban on the use of the term “natural” impact companies that use it in either their company name or a product name?

Rather than an outright ban or some sort of formal definition, we think the best solution to the “natural” labeling dilemma is for FDA to simply do nothing. And that’s both because every consumer has a different interpretation of what the term “natural” means, and because there’s already plenty of information available to consumers to help them decide what food products are and aren’t “natural.”

For example, FDA wonders whether manufacturing practices, such as pasteurization, should be considered in determining when a food can be called “natural.” It seems likely that consumers of raw milk wouldn’t consider pasteurized milk to be “natural,” and everybody else probably would, or wouldn’t care.

Between information on ingredient statements, company websites and elsewhere, consumers can gather enough information to decide whether foods are “natural,” depending on how they define the term. They don’t need FDA’s help.

On Raw Milk Cheese, FDA Should Listen To Europe

origianally appeared in the 11/13/15

Back at the end of July, the US Food and Drug Administration asked for comments and data to help the agency identify and evaluate intervention measures that might have an effect on the presence of bacterial pathogens in cheeses made from raw milk. The agency received somewhere around 45 comments during the comment period that ended early last week.

As reported in a lengthy story that starts on our front page this week, comments submitted to FDA touch on a number of subjects pertinent to raw milk cheese, ranging from the 60-day aging rule and HACCP to indicator organisms and product testing.

There are several conclusions that can be reached when reading through these comments, but we’ll mention just a couple here, and they’re related. First, it doesn’t appear that the current 60-day aging rule for raw milk cheese has many, if any, fans outside the US.

Indeed, the current 60-day aging rule is far from universally supported even in the US, where it’s been the rule of law for somewhere around six decades. Just to cite two examples from comments submitted to FDA:

•Crown Finish Caves LLC, a cheese aging facility located in Brooklyn, NY, does not feel science supports the 60-day rule and aging periods “are inconsequential as the risks can be managed.”

•Cellars at Jasper Hill, based in Greensboro Bend, VT, said aging periods are of “no consequence or significance” in its food safety plan, and that the 60-day aging period “aggravates the food safety implications for some of our award winning cheeses.”

For our second conclusion, we note that Cellars at Jasper Hill further recommended that FDA abandon the 60-day aging requirement for raw milk cheese and should harmonize performance criteria for pathogens in both pasteurized and raw milk cheese with EU Regulation No. 2073/2005.

Yes, what FDA should do, or probably should have done years ago, is harmonize its raw milk cheese regulations with those of the European Union. There are at least two good reasons why FDA should now take this approach.

For one thing, as the European Commission pointed out, there is a “long history” of producing many different cheeses from raw milk in the EU, and the legislative basis for the EU food safety system “ensures high safety standards and consumer protection” in regard to such products.

In addition to the reference by Cellars at Jasper Hill noted earlier, at least a couple of other comments include references to the EU’s regulations. For example, the European Commission notes that Regulation (EC) No 853/2004 establishes requirements for raw milk production, the hygiene on farms, and health criteria applicable to raw milk and dairy products (everything from criteria before processing to labeling).

The point here is that the EU has far more experience and expertise in regulating cheese made from raw milk than does the FDA, just as evidenced by the relatively recent regulations (implemented in the 21st century!) that currently are applied to the production and marketing of raw milk cheeses in the EU. FDA probably has nobody working on these rules who’s as old as the rules themselves. The agency should utilize the EU’s vast experience with raw milk cheeses as it reworks US regulations.

Second, the European Commission also noted that the EU has a long history of producing raw milk cheeses “traditionally for domestic production, but increasingly, also for export.”

The EU exports these cheeses to many countries around the world, including the US. Coincidentally, the EU and the US are also currently negotiating the Transatlantic Trade and Investment Partnership (TTIP). Under that agreement, the US and the EU are seeking greater compatibility of US and EU regulations and related standards development processes.

When it comes to raw milk cheeses, US and EU regulations are currently, well, they’re less than fully compatible. There is absolutely no way the EU would ever agree to include something like the 60-day aging rule in a final TTIP agreement, and in fact it’s a safe bet that the EU will be seeking to export more raw milk cheeses, including some aged less than 60 days, to the US in the future.

The EU also exports some cheese to Australia and New Zealand and, as the American Cheese Society noted in its comments to FDA, the Australian approach detailed in a 2005 report on Roquefort cheese “provides an example of a less-restrictive, science-based path to cheese safety.” Food Standards Australia New Zealand roots pathogen control for Roquefort in the implementation of an effective HACCP-based approach supported by prerequisite programs and animal health, and verified through microbiological testing.

The bottom line to all of this, it seems, is twofold. First, the 60-day aging rule will, eventually, be relegated to the scrap heap of regulatory history. It’s not supported by science, it’s outdated, and it isn’t even supported by everyone in the US cheese industry, let alone by US trading partners such as the EU and Australia.

Second, FDA should be listening to the European Union (and countries such as Switzerland) on this issue. Europe not only has great tradition on its side when it comes to raw milk cheeses, it also has the regulations that bring those raw milk cheesemaking traditions into the global market of the 21st century.

And when (or if) FDA listens and moves its raw milk cheese regulations closer to the EU’s, US cheese makers will be able to continue producing these cheeses without the regulatory uncertainty of recent years. DG

Educating The Next Generation, Ensuring The Industry’s Future

origianally appeared in the 11/6/15

A few months ago in this space (May 22nd, to be exact), we wrote about how the dairy industry would, due to everything from growing milk production to increasing specialty cheese production to baby boomer retirements, have plenty of job openings in the future.

Our lead story last week looked at this situation from a slightly different perspective: it focused on how the next generation of dairy technologists and dairy scientists was going to be educated and trained (or not).
And the story focused on the particular concerns of the western dairy industry.

Why should this “western problem” matter to the US dairy industry? It’s pretty simple, really. The two regions that could be considered to comprise the western dairy industry, the Mountain and Pacific regions (these are the milk production regions as broken out by USDA’s Economic Research Service, and they’re the same as the West region as broken out by USDA’s National Ag Statistics Service for cheese and other dairy product production), accounted for over 41 percent of total US milk production in 2014.

And those western states include two of the top three milk-producing states (California and Idaho), and two additional states in the top 10 milk-producing states (New Mexico and Washington).

Some might also consider Texas to be a part of the western dairy industry, although ERS places Texas in the Southern Plains region and NASS places Texas in the Central region. Including Texas in the so-called western dairy region would mean five of the top 10 milk-producing states are located in the western region of the US.

As Don McMahon of the Western Dairy Center pointed out at last week’s Global Cheese Technology Forum, there are only a few professors remaining in the western region of the US who have a primary interest in dairy foods, including himself at Utah State University; Phil Tong and David Everett at Cal Poly-San Luis Obispo; Lisbeth Goddik at Oregon State University; and Bruce German and David Mills at the University of California, Davis. And Tong (who participated in that panel discussion last week) is planning to retire within the next year.

A couple of other points help illustrate the education and training situation facing the western dairy industry.
First, according to a “Dairy Technology Workforce Education” white paper included with abstracts from the Global Cheese Technology Forum, six western states do not have a university food science program, including New Mexico, Arizona and Colorado.

Granted, food science-related degrees are available in some of these states; for example, the department of family and consumer sciences at New Mexico State University offers a degree in food science technology.
But the lack of an actual food science department in three states that rank in the top 15 in milk production (New Mexico ranks ninth, Arizona 12th and Colorado 15th) should be at least somewhat concerning to the entire US.

To put this in perspective, across the Upper Midwest, South Dakota State University has a dairy science department that focuses on both milk production and dairy processing, while the University of Nebraska has a food science and technology department, Iowa State University has a department of food science and human nutrition, the University of Minnesota has a department of food science and nutrition, the University of Wisconsin-Madison has a department of food science, UW-River Falls has a department of animal and food science, the University of Illinois has a department of food science and human nutrition, Purdue University has a department of food science, Michigan State University has a department of food science and human nutrition, and Ohio State University has a department of food science and technology.

This tells us that at least some of the dairy scientists and technologists working in the western dairy industry in the future will be trained and educated in the Midwest. And that should be of concern to both regions.

It’s also interesting to note that, at the recent Collegiate Dairy Products Evaluation Contest in Chicago, there was exactly one US team from a state located to the west of perennial champion South Dakota State; that was the combined team of Washington State University and the University of Idaho.

This lack of participation is perhaps more symbolic than anything else, and can be attributed to a number of factors, ranging from the lack of a faculty member who can devote the necessary time to coach a team to budget constraints. Still, it’s difficult to put a positive spin on the lack of western teams in a contest that represents the culmination of student training by college professors who are experts in dairy product evaluation.

So what’s the solution to this dilemma? Basically, it will be up to the industry itself to ensure that the dairy centers and universities in general are adequately focused on dairy processing.

This will include a substantial financial commitment (money), but it will also require the dairy industry to maintain a higher profile with universities, to make sure that these schools understand that the dairy industry is growing in both size and complexity (and jobs), that the industry contributes billions of dollars to state economies (for example, a 2015 study for the California Milk Advisory Board concluded that California milk production and processing contributed about $65 billion in total sales to the state’s economy last year), and that well-trained scientists and technologists are key to future industry prosperity. DG

The Beleaguered Federal Standards Of Identity For Dairy

origianlly appeared in the 10/30/15

A funny thing happened at the Global Cheese Technology Forum this week in Reno, NV: a seldom-discussed dairy industry issue was mentioned no less than three times just during the opening day of the meeting.

That issue was standards of identity, which have been around in the dairy industry for almost as long as federal milk marketing orders, and are just as much in need of some serious updating, if not outright elimination.

The three opening-day speakers at the Global Cheese Technology Forum who mentioned standards of identity were Ron Dunford of Schreiber Foods, Mark Leddy of Valley Queen Cheese, and Mark Steffens of Tetra Pak. These speakers represent companies with many years of experience in the dairy business, and none of them spoke highly of standards of identity.

Coincidentally, our “From Our Archives” column just last week had an interesting item under the “10 Years Ago” heading: it was back in October of 2005 when the US Food and Drug Administration published a long-awaited proposal to allow the use of fluid ultrafiltered (UF) milk in the manufacture of standardized cheeses and related cheese products.

Note the use of the term “long-awaited” in that sentence. By the time FDA published that proposed rule in October of 2005, it had been almost six years since the American Dairy Products Institute filed a petition requesting that FDA amend the definition of “milk” to include fluid UF milk, thereby permitting the use of fluid UF milk in the manufacture of standardized cheeses and related cheese products. ADPI submitted that petition on December 2, 1999.

A little over half a year later, in June of 2000, FDA received another petition, this one from the National Cheese Institute, Grocery Manufacturers of America and National Food Processors Association. That petition requested, among other things, an amendment to the federal standards of identity to include “filtered milk” in the definition of “milk” and “filtered skim milk” in the definition of “nonfat milk” for use in standardized cheeses and related cheese products.

That 2000 petition was submitted so long ago that the GMA and the NFPA have since merged into one organization, and that organization is still the GMA but is actually now the Grocery Manufacturers Association. Time flies when you’re waiting for FDA to act on petitions related to standards of identity.

FDA’s proposed rule wasn’t the agency’s final step in its consideration of the industry petitions. About two years after it published the proposed rule, FDA actually reopened the comment period to seek further comment only on two specific issues raised by the comments concerning the proposed ingredient declaration.

The reopened comment period closed on February 11, 2008, meaning it’s now been seven years and almost nine months since FDA stopped accepting comments on the UF milk petitions and started contemplating a final rule.

And so, if and when the agency does finally issue a final rule, it’s at least somewhat likely that we’ll report that FDA issued a “long-awaited” final rule to allow (or not allow) the use of fluid UF milk in the manufacture of standardized cheeses.

Such is life with standards of identity these days. And it’s not just for cheese. It was back in January of 2009 that FDA proposed to revoke its regulations on the standards of identity for lowfat yogurt and nonfat yogurt and amend the standard of identity for yogurt in numerous respects.

Believe it or not, that proposal was even more “long-awaited” than the UF milk proposal. It was way back in February of 2000 when the National Yogurt Association submitted a petition requesting that FDA revoke the standards of identity for lowfat yogurt and nonfat yogurt and amend the standards of identity for yogurt and cultured milk. Almost nine years later, FDA finally published a proposed rule in response to that NYA petition.

Earlier this year, the International Dairy Foods Association grew so impatient that it wrote to FDA to, among other things, urge the agency to move forward with finalizing the 2009 proposed rule to update the existing federal standards of identity for yogurt.

Today, both the fluid UF milk proposal and the yogurt proposal are languishing at FDA, an agency which seems to have better things to do with its time and budget than worry about outdated standards of identity for dairy products. Indeed, with the agency focused on implementation of the Food Safety Modernization Act, which will take at least a few more years, it’s hard to see how FDA will get around to finalizing any standards-related proposals before, say, 2020.

So where does the dairy industry go from here, as far as the standards of identity are concerned? Frankly, there are no easy answers on this issue.

On the one hand, the standards of identity have generally served the dairy industry well over the years. And they have, from time to time, been updated to reflect industry changes.

But the industry has changed tremendously since ADPI submitted its UF milk petition back in December of 1999, and since the National Yogurt Association, just a couple of months later, submitted its petition to amend the yogurt standards.

So if FDA is going to basically do nothing in response to requests to amend standards of identity, and the dairy industry feels standards are hampering innovation and need updating, what’s the answer?

Maybe it’s time to think about getting rid of the standards altogether. After all, how useful are they if they are forever stuck in the 20th century? DG

Plenty Of Opportunities To Keep Growing Cheese Consumption

There was some mighty good news out of USDA’s Economic Research Service a few weeks ago: as reported on our front page back on October 2, per capita US cheese consumption reached a record high of 34.17 pounds last year, up more than half a pound from 2013.

This is a particularly welcome development because, in recent years, increases in per capita cheese consumption have not been as impressive as they were back, for example, in the 1970s and 1980s.

Specifically, per capita cheese consumption between 1970 and 1989 increased from 11.37 pounds to 23.79 pounds, or almost 12.5 pounds. From 1995 through 2014, per capita cheese consumption rose from 26.94 pounds to 34.17 pounds, or roughly 7.2 pounds.

Still, increases in per capita consumption are better than the alternative (decreases), and in fact the 1970-89 period and the 1995-2014 period each had just two declines in per capita cheese consumption.

Possibly the best news about last year’s record per capita cheese consumption is that it reminds us both of how much per capita consumption has grown and how much room there still is for further growth in the future.

That first point is obvious: per capita consumption has more than tripled since 1970, from 11.37 pounds to 34.17 pounds. And it has almost doubled since 1980.

The second point is perhaps less obvious, so it’s worth exploring further. And for starters, we’ll mention a point that we’ve mentioned in this space a few previous times: that while per capita cheese consumption in the US has grown impressively for half a century or more, it still trails that of many European countries, and trails a few of those countries by a very significant amount.

Per capita cheese consumption in the 28 countries that currently comprise the European Union was over 39 pounds last year, or roughly five pounds more than US per capita consumption.

But it’s worth noting that per capita consumption in several European countries with strong cheesemaking (and eating) traditions is considerably higher than that figure. Leading the pack, according to figures included in the International Dairy Federation’s recently released World Dairy Situation 2015 report, is France, at almost 59 pounds per person.

Yes, that is correct: the French consume about 25 more pounds of cheese per person than US consumers do.

But the French are hardly the only avid cheese lovers in Europe. Germany, Finland and Denmark all have per capita cheese consumption above 50 pounds per year, which means consumers in those countries consume about one pound of cheese per week (the IDF statistics do not include Greece, where per capita cheese consumption is said to be around 60 pounds per year). And another half-dozen EU countries have per capita cheese consumption above 40 pounds per year.

There are a couple of interesting aspects to this impressive level of EU cheese consumption. For one thing, there is more than a little European influence on the US cheese industry on the production side, so if US cheese production is dominated by European cheese varieties, there’s no reason why, given enough time, US cheese consumption can’t keep rising to more European-type levels.

And second, US consumers are likely to be seeing, and eating, more European cheese imports in the months and years ahead. For one thing, the euro has been weakening against the US dollar, which makes cheese imports from the EU more competitive in the US.

The EU is also likely to have more cheese to export to the US in the months ahead. For one thing, Russia recently extended its ban on dairy product imports from the EU (as well as the US and a few other countries). Also, the EU’s milk production quota program ended earlier this year, creating at least the possibility that some EU countries will be boosting their milk and cheese production in the future. And finally, the EU is seeking greater access to the US cheese market in the ongoing Transatlantic Trade and Investment Partnership negotiations.

So do the ERS per capita cheese consumption figures show where some potential gains might lie?
Perhaps a better question is: Where don’t potential gains lie?

Indeed, it’s noteworthy that per capita Cheddar consumption has been under 10 pounds annually for four straight years, after being above 10 pounds from 2004 through 2010. Obviously there’s room for growth there.

Per capita Mozzarella consumption has had its ups and downs in recent years, and grew by just over three pounds from 1995 through 2014, after growing by more than five pounds between 1970 and 1980. And per capita consumption of other Italian cheeses has actually declined for three straight years, despite steady increases for Parmesan consumption.

What about Swiss cheese? Per capita Swiss consumption peaked at 1.24 pounds back in 2007 and had fallen to 1.01 pounds last year. This is rather astonishing, considering the tremendous quality of some of the Swiss cheese on the market today (a Swiss cheese captured top honors in this year’s US Championship Cheese Contest, and also last year’s World Championship Cheese Contest).

Given the proliferation of Mexican, Tex-Mex and related restaurants in the US, it would seem like there’s plenty of room for further growth in per capita consumption of Hispanic cheeses.

These are just a few of the many examples of where there would seem to be room for growth in per capita cheese consumption. Maybe the US needs a new “40 by 20” program, the goal of which would be to boost per capita cheese consumption to 40 pounds by 2020.

A Few More Thoughts On Trade Pacts And Dairy

Last week in this space, we took a look at the possible impacts that the just-concluded Trans-Pacific Partnership agreement might have on the US dairy industry. We used the Uruguay Round Agreement on Agriculture, which was concluded in late 1993, as the basis for our analysis.

But there are at least a couple of additional ways of examining the potential impacts of the TPP agreement.
The first is by taking a look at the dairy impacts of a couple of other trade agreements that involved the US and other TPP countries.

One of those agreements is the North American Free Trade Agreement, better known as NAFTA, which took effect on January 1, 1994, or a year before Uruguay Round implementation began. NAFTA signees included the US, Mexico and Canada, although US-Canadian dairy trade was excluded from trade liberalization under the agreement.

So what’s happened to US dairy trade since NAFTA implementation began? In a nutshell, it’s increased between both the US and Mexico and between the US and Canada.

US dairy exports to Mexico since NAFTA implementation began have grown from about $182 million in 1994 to over $1.6 billion in 2014. Mexico for the past four years has been a billion-dollar-plus export market for the US dairy industry, and 2015 will undoubtedly be the fifth consecutive year in which US dairy exports to Mexico top $1 billion in value.

To put that in perspective, it’s worth remembering that the entire world wasn’t a billion-dollar export market for the US dairy industry until 2001.

Mexico is also the leading market for several categories of US dairy exports on a volume basis, including cheese and nonfat dry milk. Again to put this in historical perspective, US cheese exports to Mexico last year totaled about 182 million pounds; the US didn’t export that much cheese to the entire world as recently as 2006.

Since NAFTA implementation began, US dairy imports from Mexico have also increased impressively, from under $3 million back in 1994 to almost $111 million last year. So far this year, the leading US dairy import from Mexico (on a value basis) is anhydrous milkfat.

Meanwhile, although US-Canada dairy trade was excluded from NAFTA, US dairy exports to Canada have grown from just $58 million back in 1994 to $592 million last year. Canada last year ranked as the number three US dairy export market on a value basis, trailing only Mexico and China.

Among other products, Canada in recent years has ranked among the top half-dozen or so markets for US cheese exports on a volume basis.

Canada has also increased its dairy exports to the US since NAFTA implementation began, from just $24 million back in 1994 to $163 million last year. Among other products, Canada in recent years has ranked among the top dozen or so sources of US cheese exports on a volume basis.

The US also has a free trade agreement (FTA) with Australia; that agreement entered into force on January 1, 2005. As noted in a 2004 US International Trade Commission report, under that trade agreement pertaining to US dairy imports, 12 separate tariff-rate quotas were established that cover almost all US dairy imports already subject to TRQs.

Under that FTA, quota quantities will increase in the first 17 years in staged amounts, after which they will increase annually based on a compound growth rate.

Although this trade agreement with Australia has not yet been fully implemented, we do know how US-Australia dairy trade has fared over the past decade: US imports of dairy products from Australia have declined in value from $129 million in 2005 to $71 million in 2014, while US dairy exports to Australia have risen in value from just $6.6 million in 2005 to $173 million in 2014.

From these trade agreement outcomes, we can reach a couple of conclusions about what might happen under the TPP. First, US dairy exports to at least some of the countries participating in the TPP will likely increase. For example, under the TPP, Canada will eliminate its tariff on milk protein substances upon entry into force.

And second, US dairy imports from at least some of the countries participating in the TPP will also likely increase. For example, the US will eliminate its tariffs on artisanal cheeses from Canada.

Another way to examine the potential impacts of the TPP agreement is by looking at New Zealand’s reaction. That’s significant, because New Zealand is the world’s largest dairy exporter and some of the countries involved in the TPP are some of the world’s largest dairy importers (this would include Japan, Mexico and the US, among others).

New Zealand’s dairy industry greeted the TPP with, well, basically with a yawn. And that’s probably a good thing; if New Zealand’s dairy industry was celebrating the agreement, it would probably mean that most if not all TPP countries could expect to see more dairy imports from New Zealand (they probably can anyway, just not as much as New Zealand would have liked).

For what it’s worth, since Uruguay Round implementation began in 1995, US dairy exports to New Zealand have grown from less than half a million dollars in 1995 to $122 million last year (about two-thirds of that total was lactose), while US dairy imports from New Zealand have grown from $175 million in 1995 to $748 million last year.

All of this reminds us that opening doors for US dairy exports also requires opening US doors for dairy imports. Recent experience illustrates how this works.

Pondering The Dairy Impacts Of The Trans-Pacific Partnership

After several years of grueling negotiations, ministers of the 12 Trans-Pacific Partnership (TPP) countries late last Sunday announced that they had concluded their negotiations. Because dairy was one of the last major hold-ups in these talks, it’s safe to say the TPP agreement will impact the US dairy industry, at least to some extent.

Figuring out the extent of those impacts is pretty much impossible, but there is one way to cast at least a little light on that subject: by looking at some of the dairy-related impacts of the last major US trade agreement.

That would be the Uruguay Round Agreement on Agriculture, which was concluded in late 1993 and phased in through the year 2000. That agreement impacted both US dairy imports and US dairy exports to varying degrees, as the statistics would indicate.

On the import side, under the Uruguay Round agreement, the US replaced Section 22 import quotas for dairy products with tariff equivalents, which were reduced by the minimum required 15 percent in equal annual installments over six years beginning in 1995.

So what was the impact of that increased access to the US dairy market? For starters, US cheese imports increased from 335 million pounds in 1994, the year before Uruguay Round implementation began, to 416 million pounds in 2000, when Uruguay Round implementation was completed, then reached 475.6 million pounds in 2002, or about 141 million pounds higher than back in 1994.

But then there was an interesting twist: cheese imports actually started to decline. Indeed, after reaching 475.6 million pounds in 2002, US cheese imports declined for eight consecutive years, bottoming out at 305.5 million pounds in 2010, their lowest level since 1992, when they totaled 285.9 million pounds.

US cheese imports last year totaled about 363 million pounds, their highest level since 2008 but down about 113 million pounds from their peak in 2002. Oh, and only about 28 million pounds higher than back in 1994, the year before Uruguay Round implementation got underway.

US dairy imports also generated quite a bit of controversy in the years after the Uruguay Round agreement was reached. Specifically, US imports of milk protein concentrate (MPC) drew considerable concern and criticism from various US dairy organizations. These imports were also the focus of studies from, among others, the US General Accounting Office (GAO, now the Government Accountability Office) and the US International Trade Commission.

In its 2001 report, for example, the GAO noted that MPC imports “grew rapidly” from 1990 to 1999, from 805 to 44,878 metric tons (1.8 to 99 million pounds). And the US back then produced absolutely no MPCs.

Today, the US still imports quite a bit of milk protein concentrate — about 106 million pounds last year, to be exact. But the US is now also a producer of MPCs; US MPC production last year totaled 126 million pounds, up from zero pounds at the turn of the century. There were a total of 12 US plants producing MPCs last year, again up from zero at the turn of the century.

On the export side, there were concerns when the Uruguay Round agreement was concluded that the US would be forced to reduce the quantity of dairy exports it subsidized under the Dairy Export Incentive Program (DEIP). The largest of these reductions (on a volume basis) was for nonfat dry milk; the DEIP ceiling for NDM was reduced from about 239 million pounds in 1995 to about 150 million pounds by 2000. DEIP ceilings for both cheese and butter/butteroil were also reduced.

So what was the impact of those DEIP reductions? Well, US exports of nonfat dry milk actually increased from 108 million pounds in 1994 to about 186 million pounds in 2000, although that 2000 total was down more than 125 million pounds from 1999.

After that, US exports of nonfat dry milk continued to increase, topping 510 million pounds by 2004, a record 1.224 billion pounds in 2013 and 1.2 billion pounds last year. And the DEIP grew to be so irrelevant in US NDM and other export sales that it was terminated under the 2014 farm bill.

Also on the US dairy export side, US cheese exports grew from under 50 million pounds back in 1994 to around 105 million pounds in 2000, then kept rising, reaching a record 810 million pounds last year.

Finally, when examining the dairy trade impacts of new trade agreements, the focus tends to turn to the bottom line, so what about the Uruguay Round’s impact on prices? From a cheese price perspective, before Uruguay Round implementation started in 1995, the record-high price (market opinion) for 40-pound Cheddar blocks on the old National Cheese Exchange was $1.5450 per pound.

Since 2000, the block Cheddar price on the CME cash market has topped $2.00 per pound in 2004, 2007, 2008, 2011, 2012, 2013 and 2014.

At the other extreme, from 1980 through 1994, the 40-pound Cheddar block price bottomed out at $1.0850 per pound (in January of 1991), and since 2000 reached a low of 98.0 cents per pound (in November of 2000).

From all of this, we can reach at least a couple of general conclusions. First, trade agreements might affect dairy trade somewhat, but not as much as other factors, such as exchange rates, weather, embargoes and so on. And second, as US dairy trade has become more significant, price volatility has become greater.

These points should be remembered when analyzing the potential dairy impacts of the new TPP. DG


California Dreamin’ (or Nightmarin’)

published September 25, 2015

There’s an old observation that trends in the US start in California and then make their way east, but the dairy industry is now witnessing a reverse version of that: California is seeking to join most of the rest of the US dairy industry in the federal milk marketing order program, which has been around since the late 1930s.

As reported on our front page last week, USDA’s public hearing to consider the creation of a federal order for California got underway on September 22 in Clovis, CA, and is expected to last for several weeks, if not months.

For long-time industry observers, the possibility that California might become the 11th federal order is a rather remarkable development, for many reasons. For example, it’s remarkable that California would scrap its state milk order, which appears to have worked fairly well for the state over the years, for the unknowns of joining the federal order system.

California has operated its own state milk order program since 1969. And how has that worked out for California?

Well, California’s milk production has grown from 8.9 billion pounds in 1969 to 42.3 billion pounds in 2014, which is pretty impressive by almost any measure.

By comparison, from 1969 through 2014, among some major dairy states that are part of the federal order program, Wisconsin’s milk production grew from 18.1 billion pounds to 27.8 billion pounds, New York’s milk output grew from 10.4 billion pounds to 13.7 billion pounds, and Minnesota’s milk production actually declined, from 9.7 billion pounds to 9.1 billion pounds.

Meanwhile, California’s cheese production has grown from just 13.7 million pounds back in 1969 to 2.444 billion pounds in 2014, an increase of some 2.43 billion pounds. For what it’s worth, Wisconsin’s cheese production during that same period increased by 2.044 billion pounds.

Also during that period, California moved up the cheese production rankings, from 22nd nationally to second only to Wisconsin.

And California’s butter production increased from 60.8 million pounds back in 1969 to almost 613 million pounds in 2014.

So with these statistics in mind, it’s safe to reach a couple of conclusions. First, since its state order was implemented, California’s dairy industry has grown tremendously. And second, most of that growth (at least in milk and cheese production) occurred before the state added a whey factor to its Class 4b pricing formula (the whey factor was first added to the 4b formula in 2003).

How would California’s dairy industry fare as part of the federal order system? Nobody knows for sure, but we might start to find out in a year or so.

In addition to the expansion that’s occurred since California’s state order was implemented, California will also, if it joins the federal order program, be giving up its relatively streamlined process for amending pricing formulas for a federal order process that’s, well, pretty much the opposite of streamlined.

A couple of points help illustrate this. First, it may be recalled that it was back in early February when California’s three main dairy cooperatives — California Dairies, Inc., Dairy Farmers of America, and Land O’Lakes — petitioned USDA to establish a federal order to regulate the handling of milk in California.
Six months later, USDA announced that it would hold a public hearing on that proposal, starting on Tuesday, September 22, and lasting until whenever.

By comparison, and in stark contrast, the California Department of Food and Agriculture announced on Friday, May 1, that a public hearing would be held to consider amendments to the Class 4b pricing formula.
That hearing took place on Wednesday, June 3 (it lasted just one day!), the CDFA announced its decision on July 17th, and changes to the whey factor value in the Class 4b formula became effective on August 1, 2015.

So California’s entire price formula amendment process, from hearing notice to those changes becoming effective, took place in less than half the time it took for USDA to just call a hearing after receiving a petition.

Those changes to the Class 4b formula are supposed to be in effect for one year, or until July 31, 2016. It’s a pretty safe bet that California’s 4b formula will revert to what it was prior to August 1, 2015, before a California federal order becomes a reality.

There is also a huge cost factor involved here. The California dairy industry has obviously never before experienced anything close to the expenses it will incur during this federal order proceeding. Indeed, California’s dairy industry will probably spend more time attending the ongoing federal order hearing then it has spent attending milk price hearings over the past 10 or 15 years combined.

That’s not to say California’s current hearing process is perfect; there’s no such thing as a perfect hearing process (a perfect pricing system would be one that didn’t include any hearings; that would be something resembling a free market). But there’s no doubt that California’s hearing process is far, far faster than the federal order process, and it’s also a heck of a lot less expensive.

California has had opportunities to join the federal order program in the past, and we know how the state’s dairy industry has fared because it opted not to do so.

What we don’t know is how California’s dairy industry will fare if it decides to join the federal order system. If nothing else, California would be giving up control over its own fate, control that has helped propel unbelievable growth over the past 46 years. DG

More Unwelcome Attention For Raw Milk

published September 25, 2015

There has recently been some good news and some bad news on the raw milk front. The bad news is that a bipartisan group of US House members has reintroduced legislation that would, among other things, prohibit the federal government from interfering with trade of unpasteurized (raw) milk or milk products between states where the distribution or sale of such products is already legal.

The good news is that this legislation was introduced last Friday, when most people stop paying attention to the theatrics going on in Washington and start paying attention to more important things, such as football.
So perhaps these raw milk bills won’t garner all that much attention, or at least as much attention as they might have if they had been introduced, say, on a Monday during a slow news week.

As reported on page 11 of this week’s issue, two bills were introduced last Friday that would loosen current restrictions on raw drinking milk. It should be noted that these bills are aimed at raw drinking milk (or, technically, all raw milk products), rather than raw milk cheese, which is legal at the federal level as long as it’s been aged for at least 60 days.

The first bill, the Milk Freedom Act of 2015, would prohibit the federal government from interfering with the interstate traffic of raw milk products. The second bill, the Interstate Milk Freedom Act of 2015, would prevent the federal government from interfering with the trade of unpasteurized milk or milk products between states where distribution or sale of such products is already legal.

Both bills have multiple original co-sponsors. And in this era of hyper-partisanship, it’s noteworthy that both bills have original co-sponsors from both parties (the Milk Freedom Act’s original co-sponsors include nine Republicans and two Democrats, while the Interstate Milk Freedom Act’s original co-sponsors include 12 Republicans and four Democrats). The sponsor of both bills is listed as US Rep. Thomas Massie, a Kentucky Republican.

So, perhaps to its credit, the controversial issue of raw milk can be credited with bringing both parties together. That applies both to the approximately dozen and a half House members who are co-sponsoring one or both of these bills and to the roughly 417 House members who are not co-sponsoring either of these bills.

And, for what it’s worth, lawmakers from four of the top 10 milk-producing states (California, Idaho, Texas, and Michigan) are included as original co-sponsors of at least one of the two bills.
Or, to put a different “spin” on that last point, not a single lawmaker from six of the top 10 milk-producing states has chosen to become an original co-sponsor of one of these bills.

The introduction of these raw milk bills comes just a few weeks after Dr. John Lucey, director of the Wisconsin Center for Dairy Research and a University of Wisconsin-Madison food science professor, noted in a study published in the scientific journal Nutrition Today that raw milk “is not inherently safe and carries a significant food poisoning risk,” and that recent scientific reviews have concluded that there is “no reliable scientific evidence” to support any of the suggested health benefits that could hypothetically be derived from consuming raw milk (for more details, please see the story that appeared on page 5 of our August 28th issue).

No provision of either bill would preempt or otherwise interfere with any state law, sponsors pointed out.
That’s an interesting point made in Massie’s press release announcing the introduction of the two bills, because in the same release Massie is quoted as follows: “The federal government should not punish farmers for providing customers the foods they want, and states should be free to set their own laws regulating food safety.”

Well, states are already free to set their own laws regulating food safety, at least as it pertains to raw milk.
And so somewhere around 30 states allow the sale of raw milk, mostly on the farm and in small amounts. Several other states have debated bills to legalize some form of raw milk sales, but have thus far not approved such legislation.

What all of this adds up to is a lot of headaches for the dairy industry. For example, although several states have opted not to pass raw milk bills this year, the debates in those states have provided a fair amount of publicity for the dairy industry. They say there’s no such thing as bad publicity, but when it comes to the raw milk issue, well, we’re not convinced.

Meanwhile, raw milk also continues to garner a fair amount of publicity in the states where it’s currently a legal product. This publicity comes in the form of product recalls. Yes, dairy products made from pasteurized milk are also the subject of recalls, but, as one study put it, the relative risk of illness is almost 150 times greater per unit of nonpasteurized dairy product, compared to pasteurized.

The further bad news about this new legislation introduced in the House last Friday is that it adds yet another potential area of unwanted publicity for the dairy industry. Already there are 50 different state approaches to regulating raw milk. Congress getting involved means there is now a 51st potential approach (federal).

The further good news is that these bills are likely to go nowhere, either now or before the current Congress finishes its work in late 2016. Massie introduced both the Milk Freedom Act and the Interstate Milk Freedom Act in March of 2014, and that’s about as far as either bill got.

While it’s unlikely these bills will progress, the dairy industry doesn’t really need this extra attention devoted to raw milk.

New York City’s Sodium Warning Label Lunacy

Beginning in just a few short months, diners in New York City will be able to see something new on menus: warning labels next to items that are high in sodium. This is a truly idiotic idea, and an idea that is potentially harmful to the cheese industry.

As we reported last week (in a story that appeared on page 11), the New York City Board of Health has approved a proposal that requires restaurants with 15 or more locations in New York City to post warning labels next to menu items that contain high levels of sodium. Restaurants are required to start posting these warning labels starting December 1, 2015.

As if that’s not bad enough, restaurants will also be required to post a message, at the point of purchase, letting their customers know that the warning (a salt shaker icon) “indicates that the sodium (salt) content of this item is higher than the total daily recommended limit (2,300 mg). High sodium intake can increase blood pressure and risk of heart disease and stroke.”

There are at least four problems with this new sodium labeling mandate in New York City. First and foremost, it’s a pretty anti-cheese proposal.

That’s interesting in and of itself, because New York (the state) ranks fourth in the US in cheese production and has set new cheese production records for three consecutive years now. Why would New York (the city) do something so negative to something that’s so important economically to New York (the state)?

New York City is obviously known for many foods, and one of them is pizza. We can’t help but wonder how many of New York’s famous pizzerias are now going to have to start putting warnings on their menus next to certain pizzas that have what the Board of Health has deemed to be too much salt. We’re thinking a lot of pizzas with extra cheese and maybe sausage and/or pepperoni will have to include a warning label.

This new warning label also negatively impacts a couple of trends that have been quite favorable for cheese sales in recent years: grilled cheese sandwiches and macaroni and cheese. In both categories, it’s pretty easy to come up with menu items that would trigger a sodium warning, including grilled cheese sandwiches with several different cheese varieties plus bacon and/or ham and mac and cheese made with several different cheeses along with bacon.

New York City is trying to take all the pleasure out of dining out.

Yet another problem with this sodium warning mandate is that it continues a foolish trend in the nutrition world: it singles out certain foods as “bad,” rather than trying to help people improve their overall diets.

To help put this in perspective, here’s what Michael Jacobson, president of the Center for Science in the Public Interest, had to say, in part, about New York City’s new sodium warning label mandate: “Someone craving California Pizza Kitchen’s Meat Craver’s pizza, for example, might not have his or her health at top of mind, but seeing a little saltshaker next to that item on the menu might be enough to get some to reconsider. That particular meal happens to have more than 4,000 milligrams of sodium, or almost two days’ worth.”

But that pizza still represents just one meal. It completely ignores what the restaurant customer might have had to eat earlier in the day. Certainly, consuming that particularly pizza three times a day every day for a year isn’t the best approach to a well-balanced diet, but do consumers really need to be warned about something they might eat once a month, or less frequently?

Yet another negative aspect of this sodium warning mandate is that it ignores some of the recent research that’s questioning the need to cut back too extensively on sodium consumption. Over the past several years, a number of studies have cast doubt on recommendations to cut sodium consumption too much, and there’s even been some criticism about how the entire sodium-reduction war got started and gained momentum.

For example, in August of 2014, a study published in the New England Journal of Medicine concluded that sodium intake between three grams per day and six grams per day “was associated with a lower risk of death and cardiovascular events than was either a higher or lower estimated level of intake.”

And earlier in 2014, a study published in the American Journal of Hypertension concluded that both low sodium intakes and high sodium intakes are associated with increased mortality. That study identified a specific range of sodium intake (2,645–4,945 milligrams) associated with the most favorable health outcomes.

So New York City is requiring warnings on foods that fall below the recommended range for the healthiest sodium intakes? That’s ridiculous, and unhealthy.

Yet another troubling aspect of this sodium warning label is the possibility, albeit slim, that it could go national. That’s what CSPI is hoping for, but we’re guessing that this idea never makes it beyond New York City.

Finally, we have to agree with the National Restaurant Association that New York City’s mandate is “overly onerous” and places an “undue burden” on restaurants that are currently working to comply with the federal menu labeling law. That law requires calorie data on menus and also requires restaurants to offer sodium and other nutrition information in writing to customers on request. A sodium warning label on top of that federal law is overkill.

New York City’s sodium warning label on menus seems likely to raise blood pressure more than a little bit of salt possibly could.

Reasons For Optimism On Fluid Milk Sales

Let’s face it, it isn’t easy being optimistic about fluid milk sales these days. As we reported last week, US beverage milk sales in 2014, at 50.659 billion pounds, were at their lowest level since at least the late 1960s. And for what it’s worth, there are almost 120 million more potential milk drinkers in the US today than there were back then.

Reflecting that fact, per capita fluid milk consumption last year, at 159 pounds, was down 88 pounds from 1975 and likely down more than 100 pounds from the late 1960s. (Comparisons going back that far aren’t easy; USDA statistics show that, for example, per capita consumption of fluid milk and cream in 1965 totaled 292 pounds, but the category back then included not only fluid milk, but also cream, sour cream and dips, eggnog and yogurt.)

Despite these gloomy long-term trends, we’re becoming at least a little optimistic about the future of fluid milk sales. This mild optimism is based on several recent developments.

First, USDA’s statistics for 2014 did reveal one rarity: whole milk sales actually increased compared to 2013. Yes, it was just an increase of 48 million pounds (from 13.936 billion pounds in 2013 to 13.984 billion pounds in 2014), but it did represent the first rise in whole milk sales since 2000.

Why is that significant? Because, while some nutritionists may disagree, whole milk is the fluid milk category’s best product, simply because its fat content gives it some actual flavor (as compared, especially, to skim milk).

As the nutrition community begins to scale back its criticism of milkfat, and even begins to find some health benefits to it, consumers will begin to take a new look at whole milk, and our guess is that they’ll like what they see — and also what they taste.

Our guess is that last year’s increase in whole milk sales won’t be the last one over the next several years.
Another reason for some optimism about fluid milk sales is that the number of fluid milk plants is actually on the increase, according to USDA statistics.

Specifically, as we report in a story on page 15 in this week’s paper, there were 440 fluid milk plants in the US last year, 26 more than in 2013 and 52 more than in 2011. And the average product volume per plant has declined for three straight years.

These two trends represent reversals of two very long-term trends. By about 2005, there were almost 5,000 fewer fluid milk plants in the US than there were back in 1960. Meanwhile, the average volume processed per plant increased from 8.8 million pounds in 1960 to a record 194.4 million pounds in 2008.

How will this potentially help boost fluid milk sales? It seems that, with more consumer interest in local foods, the rising number of small fluid milk plants will make it easier for consumers to find locally produced drinking milk.

Some of these smaller fluid milk plants are farmstead operations, meaning consumers can not only buy milk bottled locally, but they know exactly where that milk was produced and bottled. So, for example, here in Wisconsin, a decade ago consumers might have had two or three gallon milk choices at their local supermarket, one of which was a store brand and another of which was a regional milk brand.

Today, consumers in both Wisconsin and northern Illinois can buy milk from Sassy Cow Creamery, located in Columbus, WI (about 15 miles from Madison), which bottles both conventional and organic milks (it has two distinct herds). Milk bottlers like Sassy Cow may never grow beyond the “niche market” stage, but they’re filling a niche that wasn’t being filled to a great degree a decade or two ago. And every niche helps.

The flip side of farmstead milk bottlers is the national fluid milk brand that was launched earlier this year by
Dean Foods Company, the nation’s largest milk processor and direct-to-store distributor of fluid milk. The company’s DairyPure is available in dairy cases at grocery stores around the US.

Gregg Tanner, chief executive officer of Dean Foods, said the company believes that, over the long term, DairyPure “will provide incremental benefits to consumers, our category, our customers and our company.” While it’s too soon to tell if DairyPure will be successful, a national brand in the fluid milk category certainly can’t hurt.

Also generating interest, as well as sales, for the fluid milk category are relatively new products like fairlife, which is produced and marketed by fairlife, LLC, a partnership between Select Milk Producers and the Coca-Cola Company.

Like DairyPure from Dean Foods, it’s too soon to tell if fairlife will be successful, but it’s difficult to understate the significance of having a company like the Coca-Cola Company involved in the marketing and distribution of a product. The company has a pretty deep understanding of the beverage business, to put it mildly.

Finally, while products like soy “milk” and almond “milk” have been taking sales away from traditional milk for a number of years now, the pendulum may eventually start to swing the other way. For one thing, as the Sacramento Bee reported recently, several lawsuits have been filed in recent months against Blue
Diamond and WhiteWave Foods, alleging false advertising and deceptive marketing of their almond milk products.

Second, these aren’t exactly “clean-label” foods, especially when compared to plain white milk.

Fluid milk sales may never approach their record highs again, but some recent developments indicate that sales could at least begin to stabilize, and maybe even rise, in the not-too-distant future. DG


So Much For Cheese Price Volatility, At Least For Now

Volatility. It’s been one of the buzzwords in the dairy industry for the last quarter-century or so. Indeed, when the Coffee, Sugar & Cocoa Exchange launched Cheddar cheese and nonfat dry milk futures and options contracts back in 1993, it explained that dairy price volatility had become significant enough to indicate that those futures and options markets were needed.

Cheese prices were in fact pretty volatile back then, at least when compared to most years in the 1980s. Back in the 1980s, when the National Cheese Exchange was still meeting every Friday morning in Green Bay, WI, there were years when there were very few price changes for an entire year.

In 1983, for example, there were exactly four price (technically, “market opinion”) changes at the NCE, and the Cheddar block price ranged from a high of $1.3675 per pound at the beginning of the year to $1.3100 per pound in December. The Cheddar block price stayed at $1.3600 per pound from January 14 through September 9, 1983, then “jumped” to $1.3650 for a couple of months before “nosediving” to $1.3100 in early December and then rebounding to $1.3150 later in December.

Volatility at the NCE increased noticeably by the beginning of the 1990s, as the dairy price support program became less relevant and market forces increasingly influenced price levels. In 1990, there were 33 Cheddar block price changes at the NCE, and prices ranged from a low of $1.0875 to a high of $1.4675, a range of 38 cents.

That was nothing compared to what the dairy industry experienced after the introduction of futures and options contracts. In 1996, the last full year of operation for the NCE, the Cheddar block price ranged from a low of $1.1875 to a high of $1.6950, a range of 50.75 cents.

Three years later, during the first full year of the daily cash cheese market at the Chicago Mercantile Exchange, the block price ranged from a high of $1.9725 to a low of $1.1000, an eye-opening range of 87.25 cents per pound.

Thus, at the turn of the century, it appeared that extreme cheese price volatility was here to stay. And indeed it was, with block prices ranging from 98 cents to $1.3350 per pound in 2000, $1.0675 to $1.7800 per pound in 2001, $1.0175 to $1.3900 per pound in 2002, 99.25 cents to $1.6000 per pound in 2003 and $1.3000 to $2.2000 per pound in 2004.

Even in the historically low-price year of 2009, cheese prices were extremely volatile, ranging from a low of $1.0400 per pound in January to a high of $1.7200 per pound in December.

But here in 2015, cheese prices have been, by 21st-century standards, relatively calm. The CME Cheddar block price “bottomed out” back in January at $1.4700 per pound, and peaked at $1.7800 per pound back in June. That range of 31 cents is pretty mild compared to, for example, the last full year of the old NCE and its weekly trading session.

This year’s block price range is even narrower when looking just at monthly averages. Through the first eight months of 2015, the monthly block price average ranged from a low of $1.5218 a pound in January to a high of $1.7111 per pound in June, or a range of less than 19 cents per pound.

There are a couple of additional observations that can be made about dairy price volatility now and in the recent past.

First, cheese appears to be a bit of an anomaly in the lack-of-volatility department here in 2015. By contrast — make that extreme contrast — the CME price for Grade AA butter thus far in 2015 has ranged from a low of $1.54 back in January to a high, just today, of $2.4525.

It may be remembered (should be remembered) that CME butter prices set a dairy industry record for volatility last year when they ranged from a low of $1.5400 per pound at the beginning of 2014 to a high $3.0600 per pound in September.

Nonfat dry milk prices have also been pretty volatile this year, with the CME cash price ranging from a high of $1.20 back in February to a low of 69 cents in August.

Second, what happens during the first half or so of any given year isn’t always an indication of what’s going to happen before that particular year ends. To illustrate this point, look no further than 2014, when cheese prices were above $2.00 a pound for almost the entire first 10 months of the year before falling under $1.50 briefly in late December.

In 2013, the block price during the first nine months of the year ranged from a low of $1.55 per pound in early March to a high of $1.9150 per pound in early May, and was generally in a fairly narrow range between $1.60 and $1.80 per pound during most of that period. Volatility wasn’t all that extreme.

But prices started to increase in October and November, and the block price eventually reached $2.00 a pound on December 20.

And during the first seven months of 2012, the CME block price ranged from $1.46 per pound in early March to a high of $1.72 a pound in mid-July, then started to escalate and reached $2.00 a pound on September 21 before peaking at $2.10 in October.

From all of this we can reach a couple of conclusions. First, it shouldn’t be too much of a shock if block prices reach $2.00 a pound before the end of the year. The last time blocks didn’t reach $2.00 was in 2010.
What happens during the first six to nine months of a year isn’t necessarily an indication of what the final few months will hold.

And second, volatility is alive and well when it comes to cheese prices. It just becomes less extreme at certain times. DG


US Becoming Dumping Ground For Global Dairy Surpluses

In recent years, the US has emerged as one of the world’s leading dairy exporters, but at the same time, the US has also remained a major dairy importer, particularly for cheese but also for products ranging from casein to milk protein concentrate.

US dairy imports have been mixed in recent years, but this year they’ve increased pretty impressively, both on a value and a volume basis. And what appears to be happening, at least to some extent, is that the US is becoming a dumping ground for some of the world’s dairy surpluses.

A few very recent import figures help illustrate this point. In July, licensed US Cheddar imports totaled 5.7 million pounds, up some 4.3 million pounds from July of 2014. That represented more than 20 percent of the total annual US tariff-rate quota for Cheddar (27.3 million pounds).

Meanwhile, the US has been importing a pretty high level of butterfat products thus far in 2015. Licensed butter imports during the first seven months of this year totaled 11.2 million pounds, or almost three-quarters of the annual tariff-rate quota (15.3 million pounds). Licensed imports of butter substitutes during the first seven months of 2015, at 7.2 million pounds, are up 5.4 million pounds from the first seven months of 2014.

Also, imports of high-tier butter during the first seven months of 2015 totaled 9.1 million pounds, up an eye-opening 8.6 million pounds from the first seven months of 2014.

And one more import statistic: licensed US imports of dried whole milk during the first seven months of 2015 totaled 4.3 million pounds, up 3.3 million pounds from the first seven months of 2014.

What these higher imports represent, in part, is the fact that domestic dairy commodity prices in the US are higher, sometimes quite a bit higher, than are global commodity prices. This is especially the case for butter. In July, according to USDA’s Dairy Market News, Oceania butter prices averaged under $1.50 per pound, while the CME cash market price for Grade AA butter averaged over $1.90 per pound.

What these higher imports don’t represent, for the most part, is lower domestic production (which would usually necessitate higher imports). Cheddar production through the first six months of this year was running 2 percent above the first six months of last year, although butter production was running 1.4 percent below year-ago levels through June.

And US production of dry whole milk during the first half of 2015 was up more than 30 percent from the first half of 2014.

Because these imports aren’t necessarily needed for immediate use, what we’re seeing is some build-up in US stocks of some dairy products. For example, stocks of American-type cheese at the end of July were up 6 percent from a year earlier and up 2 percent from a month earlier, while butter stocks were up 41 percent from a year earlier (but down 1 percent from a month earlier).
And manufacturers’ stocks of dry whole milk at the end of June were up 74 percent from a year earlier (but down 10 percent from a month earlier).

What these rising US dairy product imports illustrate, to some extent, is the problem some of the world’s leading dairy exporters are currently experiencing. New Zealand is the world’s leading dairy exporter, and New Zealand’s leading export market is China, followed by the US. China is also New Zealand’s leading market for whole milk powder and butter/anhydrous milkfat/cream products, according to figures from the New Zealand government.

But China isn’t buying as many dairy products as it has in the recent past, so New Zealand is looking around for other markets. US government figures indicate that New Zealand has found a market for at least some additional dairy products in the US.

For example, during the January-July 2015 period, licensed US butter imports from New Zealand totaled 2.6 million pounds, up more than 2 million pounds from the same period in 2014.

During the same period, licensed US imports of butter substitutes from New Zealand totaled 6.4 million pounds, up 5.3 million pounds from a year earlier; and licensed Cheddar imports from New Zealand totaled 8.6 million pounds, up more than 7 million pounds from a year earlier.
Meanwhile, the European Union is also facing some dairy export problems, specifically the Russian ban on dairy imports from the EU as well as several other countries, including the US.

Like New Zealand, the EU also seems to have found a home for at least a little more cheese in the US.
During the first seven months of 2015, licensed US imports of other cheese-nspf from the EU totaled 36.4 million pounds, up about 5.5 million pounds from the first seven months of 2014.

Another issue impacting US dairy imports is exchange rates. As USDA’s Economic Research Service puts it, exchange rates “are, arguably, the single most important price for any economy with significant trade.”
From October 2014 to March 2015, the dollar appreciated 8 percent from the preceding six months, which helped boost US import demand, ERS noted.

All of this should be put into the context of the current US balance of dairy trade. That is, among other things, the US remains a net exporter of dairy products, and a net exporter of cheese. And US imports of cheese, while rising impressively, aren’t close to their peak of more than a decade ago.

But it’s a bit troubling to see that, when times get tough for the world’s leading dairy exporters, they tend to look to the US to absorb some of their surplus products. DG

What If The US Still Had A Dairy Price Support Program?

Back on July 10th, the price of Grade A nonfat dry milk on the Chicago Mercantile Exchange’s cash market fell to 79.5 cents per pound.

This was a significant price for at least one key reason: it marked the first time that the price of a commodity traded on the CME cash dairy markets fell below the “old” Commodity Credit Corporation (CCC) purchase price since the Dairy Product Price Support Program was terminated last year.

And so it’s been interesting to see what’s happened, or hasn’t happened, since then. In 2014, in the months after the support program was terminated, CCC purchase prices were truly “out of sight, out of mind,” since market prices were, at least at times, more than twice the level of those old CCC purchase prices.

But dairy commodity prices have softened somewhat this year, particularly nonfat dry milk prices, to the point where, as noted above, the NDM price at the CME is now below the old CCC purchase price of 80 cents per pound. And this raises the question: what would have transpired after July 10th if the price support program was still in operation?

First, a bit of history. The dairy price support program was around for many years, but the program wasn’t really operating during its final years, so to industry newcomers, the dairy price support program is something they’ll never have to deal with. Lucky them.

But for those who have been involved in the dairy industry for a few decades, well, it’s hard to describe how important this program was at various times.

The dairy price support program was established on October 1, 1949, by the Agricultural Act of 1949, and was finally relegated to the scrap heap of dairy policy history last year, when President Obama signed the 2014 farm bill into law. So the price support program was 64 years old when it was terminated.

Over the years, the price support program ebbed and flowed in its importance to the dairy industry in general and to dairy markets (prices) specifically. Under the price support program, the CCC purchased surplus Cheddar cheese (40-pound blocks and 500-pound barrels), butter and nonfat dry milk at pre-announced prices; these purchases enabled processors to pay dairy farmers the mandated support price for their milk.

During its history, the support price ranged from a low of $3.06 per hundredweight to a high of $13.49 per hundred. Under the 1977 farm bill, the support price for milk was set at 80 percent of parity, and it had to be adjusted (raised) every six months (on April 1 and again on October 1) to reflect changes in prices paid by dairy farmers for production inputs.

In 1976, the CCC purchased around 235 million pounds of surplus dairy products, primarily nonfat dry milk.
By 1981, CCC purchases had climbed to 351.5 million pounds of butter, 563 million pounds of cheese and 851 million pounds of nonfat dry milk. CCC purchases of cheese and nonfat dry milk peaked in 1983, at 833 million pounds and 1.061 billion pounds, respectively, while CCC butter purchases reached 413 million pounds that year but peaked at 444.9 million pounds in 1992.

By 1990, the support price had been reduced to $10.10 per hundredweight, and the CCC became a less important buyer of dairy products, starting with cheese and nonfat dry milk, and later, butter.

Since then, CCC purchases have ranged from fairly low to non-existent. The most recent year in which the CCC bought any surplus dairy products was in the low-price year of 2009, when the CCC purchased about 182 million pounds of nonfat dry milk, 15 million pounds of cheese and 23 million pounds of butter (these are net USDA removals).

That brings us back to our original question: What would have happened over the last several weeks if the price support program was still operating? Our guess: at least four things in the short term.

First, it would seem likely that some dairy processors would have started selling nonfat dry milk to the CCC.
Back in 2009, when NDM prices were slightly above 80 cents per pound, the CCC was buying millions of pounds of surplus powder every week. Our guess is that the CCC would have started buying surplus powder a few weeks ago and would still be buying surplus powder today.

Second, nonfat dry milk prices would have stopped falling. Again back in 2009, NDM prices at the CME fell to the low 80s, but never below 80 cents per pound. This year, without the CCC as a buyer of last resort, the CME price for Grade A NDM has actually dropped below 70 cents a pound a few times.

Third, US exports of NDM probably would have declined. Less than a week after the CME NDM price fell below 80 cents, the average winning price on the Global Dairy Trade auction also fell below 80 cents per pound.

US dairy export statistics for July won’t be released for a few more weeks, but it seems that the US is in a better position to compete globally, because the domestic NDM price can fall below 80 cents, than it would have been had the CCC purchase price effectively floored the domestic price well above the world (GDT) price.

And fourth, sometime in the near future, USDA would have started trying to figure out ways to get rid of its surplus NDM stocks.

If the support program was still operating, milk prices might be a bit higher (at least the federal order Class IV and California 4a prices), but exports would likely be lower, and the market would have millions of pounds of surplus CCC-owned powder hanging over it.

Bottom line: the US dairy industry is better off without the dairy price support program. DG

A California Federal Order And Its Nationwide Impacts

While pretty much every step in the process has been based in California, the prospect of a California federal milk marketing order certainly will have implications far beyond that state’s borders. And that makes the California federal order hearing that begins next month worth watching for everyone involved in the US dairy industry.

As reported on our front page last week, the US Department of Agriculture announced that a public hearing will be held beginning on Tuesday, September 22, 2015, in Clovis, CA, to consider and take evidence on a proposal to establish a federal order to regulate the handling of milk in California. If still ongoing (as expected), the hearing will be held on October 22 and 23 in Fresno, CA.

As noted above, everything about this hearing, up until now, has been California-based. It was more than two years ago when California’s three largest dairy cooperatives — California Dairies, Inc., Dairy Farmers of America and Land O’Lakes — announced that the findings of a five-month study they commissioned indicated that a properly written federal order for California would provide a regulatory structure that could potentially result in higher farmgate milk prices.

About a year and a half after they announced those study findings, the three co-ops petitioned USDA to conduct a hearing on a possible California federal order. Three California entities submitted alternative proposals, information meetings were held in California, and in a little over a month, this long-anticipated hearing will begin in California.

But while a California federal order would have profound and lasting implications for California’s dairy industry, its potential implications on the dairy industry beyond its borders cannot be understated. This point becomes obvious when reading through USDA’s preliminary regulatory impact analysis of the co-ops’ proposal, as well as other proposals.

Notably, the co-ops’ 2013 study findings appear to have been confirmed by USDA. Specifically, the agency’s preliminary impact analysis forecasts that adoption of the co-ops’ proposal would increase total California producer revenue by an average of $700 million per year across the 2017 to 2024 forecast period, and would also increase the California all milk price by $1.03 per hundredweight and boost California milk production by 540 million pounds per year.

So USDA’s study agrees with the study conducted two years ago on behalf of the co-ops: a properly written California federal order would provide a regulatory structure that could potentially result in higher farmgate milk prices in California. Quite a bit higher, as it turns out.

But while a California federal order (established as the co-ops have proposed) would have a positive financial impact on California dairy producers, it would have a negative financial impact on dairy producers outside the Golden State, USDA’s analysis shows.

Specifically, the increase in California’s milk production would lead to lower uniform prices, lower all-milk prices, and lower producer revenues across most of the rest of the US, with the exception being the current unregulated areas of the former Western federal order, where “modest increases” in producer revenue and increases to the all-milk price would be similar to those observed in California, USDA said.

This raises a couple of interesting points. First, because two of the three co-ops behind this California federal order proposal — DFA and LOL — are based outside California, how thrilled are the co-ops’ non-California members going to be when they find out this proposal will potentially reduce their milk prices?

And second, since USDA’s analysis indicates that milk prices in currently unregulated areas of the former Western order would increase under the co-ops’ proposal, might we see, if a California federal order becomes a reality, more producers push to terminate their orders in order to boost milk prices?

Taken to the extreme, we could see a highly improbable situation, a few years down the road, in which the federal order system includes just one order, the new California order, and all other orders have been terminated. Yes, that’s highly improbable, but many observers have said for many years that it was highly improbable that California would join the federal order system.

At the plant level, the co-ops’ proposal would, according to USDA, reduce national prices for Cheddar cheese, butter, nonfat dry milk, and dry whey for the period of 2017 through 2024, which would also reduce federal order class prices. In California, the California Class I price would decline, while other class prices would increase, including the California Class III price, which would rise by $1.84 per hundredweight.

This latter point reminds us again of the talk, at the 1989 Midwest Milk Marketing Conference, by Bill Blakeslee of Mid-America Dairymen (now part of DFA). Blakeslee talked about California’s Class 4b price being so much lower than the federal order cheesemilk price (then the M-W price) that California cheese could “go from the West Coast to the East Coast and have a competitive advantage over the Midwest.”

That “competitive advantage” that California has had for all these years would basically disappear if a California federal order becomes a reality. And at the same time, more milk would go into Class III and Class IV products in California.

And that’s a key reason why a California federal order has such enormous implications for the US dairy industry.

FDA Needs To Hear From Industry On Raw Milk Cheese

Well, that didn’t take long. Just a week after we called on the US Food and Drug Administration (FDA) to “move ahead on changing its raw milk cheese regulations,” the agency did just, sort of. It’s a small step, granted, but at least FDA is finally taking the initiative on the raw milk cheese issue.

As reported on our front page last week, FDA is requesting comments and scientific data and information that will help the agency in identifying and evaluating intervention measures that might have an effect on the presence of pathogens in cheeses made from raw milk. Electronic or written comments and data may be submitted through November 2, 2015.

FDA’s Federal Register notice inviting public comments is pretty brief, but also pretty telling. The agency noted that a 2012 review of foodborne illness outbreaks that occurred between 1993 and 2006 that were attributed to dairy products determined that more than 50 percent of the outbreaks reviewed in the study involved cheese, and that 42 percent of the 65 cheese-associated outbreaks were attributable to products manufactured from raw milk.

The 60-day aging period for cheese made from raw milk was “presumed to act as a control measure to reduce the risk that pathogens would be present when the cheese was consumed,” but the “available data and information raise questions about the safety of cheese” made from raw milk, “even when aged,” FDA stated.

Also last Friday, FDA released the “Joint Food and Drug Administration/Health Canada—Sante Canada Quantitative Assessment of the Risk of Listeriosis From Soft-Ripened Cheese Consumption in the United States and Canada,” which concluded, among other things, that there is, “approximately, a 50- to 160-fold increase in the risk of listeriosis from a serving of soft-ripened cheese made from raw-milk, compared with soft-ripened cheese made from pasteurized milk” (this observation is from the 10-page “Interpretive Summary,” rather than from the 192-page report itself).

In its request for comments, FDA said it is “continuing to evaluate the safety of processes for the manufacture of cheese, particularly processes for the manufacture of cheese from unpasteurized milk,” but it’s pretty obvious that the agency has already concluded (and likely reached this conclusion back in the late 1990s) that it considers the 60-day aging period for raw milk cheese to be inadequate.

Indeed, it points out that results from the FDA-Health Canada Quantitative Risk Assessment on listeriosis “suggest that the 60-day aging period for soft-ripened cheese may increase the risk of listeriosis” by allowing more time for L. monocytogenes, if present, to multiply (rather than decrease) as the cheese ages.

So, if nothing else, FDA’s request for comments and data can realistically be considered the beginning of the end of the 60-day aging rule for raw milk cheese.

FDA said it is specifically requesting comments and scientific data and other information to, among other things, understand current practices to reduce the potential for foodborne illness during the manufacture of cheese from raw milk. For example, to what extent do raw milk cheese producers solely rely on an aging period to significantly minimize pathogens that may be present in unpasteurized cheese? And what are those other control measures?

The agency also wants to know whether, for pathogens other than Listeria monocytogenes, a 60-day aging period is effective in adequately reducing a broad spectrum of pathogens that could be in cheese made from raw milk.

And FDA wants to understand the prevalence of testing during manufacture (for example, testing for pathogens of each lot of cheese manufactured from unpasteurized milk and of bulk shipments of raw milk), how practical such testing would be, and how much it would cost.

The FDA-Health Canada risk assessment provides some interesting perspective on testing. Here’s what that report says: “For raw-milk cheeses, testing milk is less efficient than testing cheese lots.” It would appear that any future FDA regulation of raw milk cheese will include some sort of final product testing requirement.

It will be mighty interesting to see how many comments FDA receives in the next three months, and also how diverse those comments are. FDA received a total of 96 comments on its draft risk assessment of listeriosis in soft-ripened cheese; those responses came from organizations such as the International
Dairy Foods Association and American Cheese Society, as well as a number of cheese makers and others.

And that was just a draft risk assessment. Now, FDA is interested in comments and data on various issues related to the manufacture of raw milk cheese, with the obvious outcome eventually being changes to the current 60-day aging requirement.

So the clock has started ticking. FDA has established a comment deadline of November 2, 2015.

Our guess is that the agency will hear from entities around the world, not just in the US. After all the US imports more than 300 million pounds of cheese every year, and a fair amount of that cheese is made from raw milk. Any changes to FDA’s raw milk regulations could have a significant impact on cheese makers around the world who export to the US, as well as US companies that have long imported those cheeses.
No doubt some people would like the US to be able to import more raw milk cheeses.

Comments can be submitted electronically at: www.regulations.gov. The docket number is FDA-2015-N-2596.

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