Wednesday, November 07, 2007

Reason #27...

Why hunting for the cloud behind the silver lining of grain prices should be a low priority. One of corn's best customers - the dairy industry - can't lactate enough for modern demand.
But the biggest force driving up milk prices is the same one that has driven up prices for conventional commodities like iron ore and copper: a roaring global economy. Rising incomes, from China and India to Latin America and the Middle East, are lifting millions of people out of poverty and into the middle class.

It turns out that, along with zippy cars and flat-panel TVs, milk is the mark of new money, a significant source of protein that factors into much of any affluent person's diet. Milk goes into infant formulas, chocolates, ice cream and cheese. Most baked goods contain butter, and coffee chains like Starbucks sell more milk than coffee.

Just meeting that demand, according to Alex Duncan, an economist at Fonterra, the dominant dairy cooperative in New Zealand and the world's largest dairy-exporting company, will require the addition each year of the equivalent of New Zealand's entire annual milk output.

That is a lot of milk. New Zealand is one of the world's largest milk producers, according to IFCN Dairy Research Center in Germany, but the largest exporter of dairy products. Some dairy economists doubt the world's heifers are up to the task, and say there is a possibility that the shortage of milk now being seen in parts of the world will spread. [More]
The dairy industry is farther along the road to full industrialization than grain production, and I think for that reason alone, they will react more rapidly to this opportunity. I fully realize there is a growing agrarian segment (organic, pastured, etc.) , but that sector seems to find its best markets at the high end.

Meanwhile the amazing shrinking dollar is making the US the likely source for future dairy expansion. And the enormous output of DDG's from ethanol production can only add to the allure.
Some see the United States as another main source of additional milk supplies. International prices have now risen above the subsidized price of milk there, making it profitable for American dairies to export their milk. "There's a real opportunity for the U.S. to export without government support or subsidies," Goode said.

Hemme at IFCN estimates that both the U.S. Midwest and Europe could multiply their milk production. But it would take one or two years and require using more costly corn and grain. So even if milk supplies keep up with demand, the price will stay high.
Recently a gentleman from Ohio called to ask USFR to investigate the "dairy invasion" of Northwest Ohio by Dutch immigrants. These polite, industrious interlopers present a challenge to American feelings of ethnocentric agricultural hegemony.
With Vreba-Hoff's help, almost 50 Dutch families have set up dairy farms in Michigan, Indiana and Ohio over the past decade. The company oversaw the design and construction of the dairy for van der Vegt and helped him obtain financing and immigration papers. Now van der Vegt, 42, is moving to a 3,500-cow operation near South Bend, Ind.

"They come here just so they can keep dairy farming, because they love it," said Cecilia Conway, who runs Vreba-Hoff's U.S. operations with her sister and four brothers. She said the dairies help stimulate stagnant rural economies.

But residents are not exactly rolling out the welcome mat.

The 6,000-cow operation Vreba-Hoff runs in south-central Michigan and many of its other dairies have clashed with state regulators and residents. People complain of an overpowering stench and environmental pollution from the "Dutch dairies," which generally house several thousand cows in what are known as concentrated animal feeding operations and produce hundreds of thousands of gallons of manure each day. [More]
As grain farmers rejoice in the weak dollar (admittedly a value judgment), dairy producers may find euro-rich competitors arriving in , well, herds. This trend is just beginning. As the EU seems to be working its glacial way to reining in its ag subsidies, more world class farmers could show up on our shores with real money to spend.

After all, it's happened before.

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