It doesn't get better...

At least in the near-term IMHO for the dairy industry.  I was stunned and dismayed by the comment below from an ag lender:

Your comments about dairy hit home way too hard. As an ag lender with some 150 dairy accounts in our portfolio. We have the 800 numbers for all suicide hotlines in the counties we serve next to EVERY phone, and on every corkboard. We have taken calls from borrowers who are standing on top of the 80' silos and asking why they should not jump. A husband went to the barn recently to milk the cows and when he came back to the house the wife had removed all her clothing from the house and all the children and their pillows were gone. Can you say STRESS! As loan officers were are not trained in these areas of expertiese, but that is our calling at the moment. Trying to get on the learning fast track.

Now I read this morning about collateral damage farther up the value chain.

Companies disappear all the time. Sure, it may be news when large corporations with well-known brands go belly-up. But think about it: Businesses like Circuit City, Northwest Airlines and Countrywide are gone now.

24/7 Wall St. recently looked at a number of large American companies, some of which are owned by foreign companies, to see which will disappear in 2011. A vanishing firm may go bankrupt and its assets sold off, it may be closed after being bought by another company or it may cease to exist due to a merger.

The website looked at a variety of companies: those that are in deep trouble, the merger and acquisitions targets, firms in industries that have too many competitors for any to become highly profitable or corporations that Wall Street believes are worth more in parts than as a whole. The 19 companies below were picked from this universe, because odds they are they won't exist a year from now:
...

Dean Foods
The maker of dairy products like Land O'Lakes and Silk has struggled as much as any other large public company this year. The costs of raw milk, butterfat, soybeans and sugar have risen sharply. Dean Foods has also been crippled by debt. The firm's shares were down as much as 60% at one point during the last 12 months.

Despite all the bad news, hedge fund investor David Tepper bought a 7.35% stake in the company. Dean Foods shares rose 9% after the announcement. Dean has already sold its yogurt business to Schreiber Foods. And Tepper, one of the cleverest investors on Wall Street, has probably bet the balance of Dean Foods will be sold off in parts. Probably the Fresh Dairy Direct-Morningstar and WhiteWave/Alpro business units would draw the most bidders. Watch for Dean to be broken up, to satisfy debtholders and large investors.[More]

The casual references to "demand destruction" floating around the grain pits really masks the reality of the process. We're talking about wiping out an entire level and lifestyle of dairy production. I understand the economics and the fact this process may have artificially delayed by policy for too long - making it even more painful than it might have been. But I still wonder if we are repeating the buildup into too-big-to-fail dairy units.  

I know some lenders are sitting on dubious dairy loans, and not just smaller producers mentioned above. I have heard that they are pressuring regulators to not force them to mark-to-market just like housing lenders struggled with.

But even a slightly-less-than-huge corn crop coupled with the insane drive by the ethanol industry to further skew the corn market by mandate has to be a threat to dairies of every size and consequently lenders of every size. (While it is attracting more bipartisan opponents, the ethanol lobby has been a bad one to bet against.) Plus the resurgence of cotton apparently has dampened optimism about new acres to produce corn. The growing supply-demand balance will not serve corn farmers well in the long run either, as missing customers and consumer resentment will linger for decades.

My great fear is these pressures will not simply downsize the dairy industry but eviscerate it by cascading failures. Consider what cow prices will do when liquidation starts and how that sucks down the little remaining equity in many herds, in turn pressuring more lenders.

I imagine voices in the heads of many producers are screaming "Get out now!" but their hearts cannot embrace the idea. And as the wrenching words of the ag lender above display, I fear small banks especially will suffer with their customers in a valiant, but ultimately futile effort to out-wait this downturn. This market can stay irrational longer than producers can stay solvent - to use the old adage.

This chapter will not end well. And my sector (grain) will not look back with pride on our role.

Oh, yeah...

I told you I would mention my observations after the Elite Producer Business Conference. (Thanks, JR)

In no particular order. [Hey - your mind will work this way too someday.]

• The pressure on California dairies is intense. Water may be the biggest threat, but producers are really nervous about immigration issues.
• Cheese consumption is exploding.  Although it wasn't mentioned it is also being noticed by obesity experts. There is a lot of fat in cheese.
• Food retail at all levels are cutting the number of items (SKUs) pretty sharply.  We may only have 48 kinds of corn flakes.
• Traditional supermarkets (e.g. Kroger) continue to lose ground to supercenters and discount clubs. The concentrates buying power even more intensely into fewer hands.
• Dairy at retail is the most profitable sector in the supermarket, but frequently is constrained by its floor space due to being crammed onto outside walls. More retail info here.
• Yogurt is the dairy product of the near future.
• Every speaker I heard had a remark about "biofuel" policy.  Not a happy comment either.
• Regional banks are looking for the exit on large dairies, according to some.  Where that capital will be replaced is a big question.
• I talked to one 500-cow guy who is seriously considering shrinking back to just his very profitable breeding business.
• A presentation by the Ohio animal welfare coalition left many producers glad their state doesn't have initiative power for voters.  Many producers are already getting ready to comply with stricter handling rules.
• Dairy is the poster child for the productivity curse. From breeding technology likes sexed semen to robomilkers, every advancement makes overproduction just a little easier.
• Policy outlook seemed to be "something's gotta change".  Frankly my eyes glazed over during the pricing support discussions.  They were pretty realistic about maybe less aid would actually be less distortionary.

Overall, I felt a grim determination in the face of a very difficult outlook.  While looking for markets overseas, local economic/regulatory conditions seemed to be the forest fire of the moment.

If I remember anything else, I'll update this post.

Forget "sports drinks" or "energy drinks"...

Get a load of the power of the "civilization drink": milk.

One of the reason the sight of Visigoths coming over the hill toward them was pretty unnerving to Roman soldiers was the dudes were huge - relatively speaking.  And all because of a tiny evolutionary mutation and the ultimate secret weapon - the cow.

The new settlers also had something of a miracle food at their disposal. They produced fresh milk, which, as a result of a genetic mutation, they were soon able to drink in large quantities. The result was that the population of farmers grew and grew.

These striking insights come from biologists and chemists. In a barrage of articles in professional journals like Nature and BMC Evolutionary Biology, they have turned many of the prevailing views upside down over the course of the last three years.

The most important group is working on the "Leche" project (the name is inspired by the Spanish word for milk), an association of 13 research institutes in seven European Union countries. The goal of the project is to genetically probe the beginnings of butter, milk and cheese.

An unusual circumstance has made this research possible in the first place. Homo sapiens was originally unable to digest raw milk. Generally, the human body only produces an enzyme that can break down lactose in the small intestine during the first few years of life. Indeed, most adults in Asia and Africa react to cow's milk with nausea, flatulence and diarrhea.

But the situation is different in Europe, where many people carry a minute modification of chromosome 2 that enables them to digest lactose throughout their life without experiencing intestinal problems. The percentage of people with this modification is the highest among Britons and Scandinavians (see graphic). [More of a must-read for any dairy producer]

 

[Click to embiggen]

The ability to tap into this mother-lode (heh) of protein and fats helps me understand why dairy farming is deeply woven into the tradition of  agriculture of Northern Europe. (Check out the slopes they graze in Switzerland, for one extreme).  Milk literally made them the people they are today.

 [Source]

Not only could cows utilize some pretty marginal terrain, but the invention of cheese provided a storage and nutrient concentration method that further exploited this food source.  This evolutionary advantage we take for granted is also one big headache for the global future of lactose-purveyors as much of the population growth is not occurring among milk drinkers.

Experts disagree on the extent, but it also adds into the reason the Dutch (big dairy consumers) have shot past Americans as the tallest people in the world, although superior pre- and post-natal and genetics care are likely much bigger factors.

While obesity has tripled in many Western European countries since the 1980s, the Dutch keep growing upwards. The average height is now 6 feet 1 inch for Dutch men and 5 feet 7 inches for Dutch women. So why are the Dutch so tall? Theories abound. An often-heard argument is the Dutch love of dairy and their protein-rich diet, but there are also serious studies that look at height differences, and the Dutch pop up time and again in many of them. [more]

 

Milk - it does a people good.

The protein industry can't catch a break...

I have great concerns about the future of our meat and dairy sector.  While I expect it to survive, I also cannot see a way for it to avoid wrenching changes and probable downsizing as additional costs move their business plans to less, but more expensive meat consumption in the US.

Look at the list of challenges: assorted consumer health concerns, food trends, animal welfare issues, environmental liability (especially with CAFOs), ethanol-fueled feed cost increases.

And now blowback from our immigration turmoil.

Residents of a small city in eastern Nebraska voted Monday to banish illegal immigrants from jobs and rental homes, defying an earlier decision by the city’s leaders and setting off what is all but certain to be a costly and closely watched legal challenge.
In Fremont , a meat-packing town of about 25,000 people, unofficial results from The Associated Press late Monday showed that 57 percent of voters approved a referendum barring landlords from renting to those in the country illegally, requiring renters to provide information to the police and to obtain city occupancy licenses, and obliging city businesses to use a federal database to check for illegal immigrants.
Opponents of the new law, including some business and church leaders, had argued that the City of Fremont simply could not afford the new law, which is all but certain to be challenged in court. In a flurry of television commercials and presentations by opponents in the final days before Monday’s vote, opponents said paying to defend such a local law would require a significant cut in Fremont city services or a stiff tax increase — or some combination of the two.
“There were a lot of tears in this room tonight,” said Kristin Ostrom, an opponent who gathered with others in an old V.F.W. building to await the results. “Unfortunately, people have voted for an ordinance that’s going to cost millions of dollars, and that says to the Hispanic community that the Anglo community is saying they are not welcome here. They thought they were coming to a small-town community with small-town values.” [More]

I have no advice for the citizens of Fremont, nor would it be welcome or even useful.  I have lived in a lightly populated rural community for long enough to expect such major debates unfortunately have to drag to an exhausted surrender by both sides. I don't live there - they do.  I do grieve for the collective pain they will be wading through for too long.

But it adds one more burden on an industry already struggling, and probably is spooking the feeders who depend on that plant.

Perhaps it is the cumulative consequences of an industry that failed to temper economic efficiencies such as large feeding facilities, demanding processing work, and wrenching production culture shifts with some inkling the limits of low cost food as a reason for all.

Like too many other examples, the dimly understood and analyzed externalities like smell, or in this case community upheaval have finally shown up on the industry P & L.  Big time.

At any rate, we will be reinventing our protein sector pretty rapidly, I think.  The intensity of public rancor over these issues may no longer allow thoughtful, deliberate action - just wins and losses.  And I suspect there will be more losses than wins.

Comment of the Week...

At least one dairy farmer is keeping his sense of humor.

John:
At a dairy meeting I attended the speaker said that Americans consume the equivalent of roughly 193 acres of pizza per day. Our job as promoters of dairy products was to work to increase that acreage, since half of USA milk is made into cheese, and a large percentage of cheese goes on pizza. You bring up an interesting problem--there has been "topsoil" erosion on that acreage!

[Context]

Tim Pawlenty hates dairy farmers...

(And grape growers)

I have always wanted to post something like this - totally unfair, out of context, and attacking one silly rhetorical blunder.  But even then, what was Terrible Timmy thinking?

One of the real oddities of the contemporary conservative movement is its intense contempt for the perceived personal consumption habits of contemporary liberals. Particularly odd is that this is normally phrased as a hyper-defensive accusation that liberals have contempt for conservatives. At CPAC today, Tim Pawlenty went off an a really nasty rant about how liberals all sneer at conservatives for not having gone to Ivy League colleges and for not liking “brie and chablis.”
For one thing, I defy anyone to find a single example of liberals sneering at Pawlenty for having attended the University of Minnesota. It’s a good school! What’s to sneer at? And who’s sneering? Meanwhile: brie? Really? Ramesh Ponnuru likes it. They know all about it at Sam’s Club. Of course in Minnesota, local favorite Target is the big box retailer of choice and they sell this nice cheese board. At the St Paul Cheese Shop about 1.2 miles from Pawlenty’s house they’re offering what sounds like a nice sandwich of prosciutto di parma and Great Lakes brie. [More]

Obviously aspiring pop-conservatives like Pawlenty will say anything for an applause line at CPAC. Embracing populist egghead-bashing works pretty well, except he seems to be unaware the American cheese-buying market has moved on from Velveeta. At the least, it was tragically dated.

The mustiest of Tim Pawlenty's attacks today was on San Francisco elites who eat brie and drink Chablis.

Both are available at Wal-Mart. [More]

What is the point in market-driven dairy producers seeking to serve a lucrative premium market if politicians who claim to be on their side ridicule their customers?

More than you want to know...

About butter sculpture.  At this time of year it is obligatory for the media to cover a butter carving of some sort at a county/state fair.  In fact, we're doing one next week on USFR.

But a cow sculpture is soooo 1960.  Here is an example what I think we should be looking at.

 

[More]

Pass the bread, please.

[via presurfer]

Vermont Fact o' the Day...

It's slowly being reclaimed by forests.

Forests, in comparison, appear to be growing in size. A century ago, woodland covered about a quarter of Vermont. Today that figure is three-quarters — the third-highest percentage in the nation. [More]

Also interesting information about the future of the hard-pressed dairy industry there.

Somebody else noticed dairy exports...

The last few years.  It seems investors are looking at the Chinese milk market and seeing the next Big Thing.

Reuters reported last December that KKR planned to invest $100 million in the Chinese dairy, taking a stake in a fragmented and troubled industry.

Other investors may pour $150 million more into the company alongside KKR, said the source at the time. Monday's announcement did not include financial terms.

The investment is among the few China deals for New York-based KKR, one of the world's biggest and oldest private equity firms that arrived in Asia only a few years ago.

KKR is investing in an industry that, while tainted by last year's milk scandal, reaches into the world's largest consumer market.

KKR is known for participating in some of the biggest leveraged buyouts across the United States, Europe and Asia. So, while this relatively small deal in a Chinese dairy farm is unique to KKR, other Western firms have put money into the industry. [More]

It doesn't take an MBA to figure out where the global dairy trade is headed. (Very helpful stats here).  Still, this type of investment is singular for KKR and could presage a new challenge for our domestic industry as it becomes advantageous to raise production in the biggest markets rather than load up ships and export to them.

While I have anticipated outside investment in all kinds of agriculture, the easy flow of capital around the globe, has reduced the advantage US producers have enjoyed simply because we were close to the money.

The subject I will be investigating is whether these investors have maintained their positions over the last year as other sectors declined sharply. Certainly there was considerable interest.

The New York Times describes how some big-money players are skipping the commodities market and going directly to being hard asset players by buying farmland and grain elevators. This is hardly new (I know of one global macro fund that was making ag related investments two years ago) but the Times piece gives the impression that quite a lot of money is suddenly chasing this theme.

While in theory having more capital deployed in food production would be a Good Thing, the equation isn't necessarily that straightforward. Yes, 70% of the world's farms are not at the highest level of productivity that modern techniques can produce, so more gains are possible. But this isn't a linear equation where farmland + more dough = more output at a higher profit. Modern agricultural techniques are both energy intensive and fertilizer intensive, and both are increasingly costly. A land grab may produce an input squeeze that erodes much of the hoped-for return. [More]

Anecdotal evidence suggest interest in farmland has perked up lately, undoubtedly sparked by a strong commodity run over the last two months.

After spending months on the sidelines, investors are starting to return to the nation's agriculture land as a home for their investment dollars. Investors have long played a role in the land-buying market, but toward the end of 2008 those once active investors retreated, according to Lee Vermeer, AFM, vice president of real estate operations at Farmers National Company.

"Investors stepped aside around November, but they have gotten back in the game," said Vermeer. "Everyone was trying to figure out the stock market and whether the economy had bottomed out. Some believe it has. Now that the uncertainty has subsided, buyers are looking for investments they can feel good about."

During the past six months, owner/operators around the country took advantage of the decline in investor attention and purchased available land to expand their operations. It was that activity that kept land values steady despite the turbulent economy.

"A good indication of the strength of the land market was that even with all the uncertainty and the stress on the market the past six months – land values held," said Vermeer. "I think that speaks to the quality of the land, but also shows the confidence today's buyers have in the land market as an investment opportunity."

Vermeer said the land market did slow somewhat last fall and there were some weak spots around the country the first part of 2009. He attributed the slow down to the drop in commodity prices. In the past 30-45 days, however, Vermeer said the market is gaining ground. [More]

My axiom is the farmland market is a better judge of ag sector health than commodity prices, and even with a hiccup over the last few months, it appears to be a place money wants to be, regardless of the location.

Canadian dairy operators...

Take on soda pop.



HFCS is obviously not the flavor of the month anymore.

[via presurfer]

This is going to get really ugly, I'm afraid...

For grain farmers like me, as we watch the train wreck that is the dairy crisis, we should be at least uneasy with our consciences.  To be sure, the dairy industry is caught between two government schemes: their perverse pricing system and government ethanol mandates which have raised the price of feed.

Has agricultural success for some of us been reduced to the product our lobbying prowess?

Jim Dickrell is doing high caliber work, and bravely offering pointed opinions on causes and effects.

What’s happening is every producer is waiting for his neighbors to blink first. And prices aren’t improving. The June Class I price came in at $10.08/cwt. The May Class III price was announced last week at $9.84; the May Class IV at $10.14.

At the Elanco meetings, Elam couldn’t predict when milk prices will rebound to profitability. The best he could do: “We could see fourth quarter all-milk prices at $14/cwt,” he says. “But 300,000 cows (including the 100,000 CWT leaving this month) will have to go away by the end of the year.”

So the question is two-fold: Who will blink? And when will they blink? One producer I sat with at lunch last Thursday made this prediction: “Things won’t turn around until everyone is convinced things won’t ever get any better.”

My advice: If you can’t survive the next six months at your current mailbox price, don’t let what equity you have left erode further. The sooner you make that decision, the better off you and the rest of the industry will be. [More]

This will be a sad summer for too many dairy farms.

The remorseless market...

The fact the organic milk market is faltering is not particularly surprising to me, but it is one of the sharper downturns in the otherwise dismal dairy industry.

 

[More]

(We are seeing too many of these cliff-diving charts for my comfort)

Painful too are the stories of shattered dreams for the mostly small producers who invested to make the switch.  The combination of feed prices and the reality of hard-to-prove organic "benefits" have consumers substituting "down" to regular, cheaper milk, while expenses obliterate margins.

But soon the price of organic feed shot up. Then the recession hit, and families looking to save on groceries found organic milk easy to do without. Ultimately the conglomerate, with a glut of product, said it would not renew his contract next month, leaving him with nowhere to sell his milk, a victim of trends that are crippling many organic dairy farmers from coast to coast.
For those farmers, the promises of going organic — a steady paycheck and salvation for small family farms — have collapsed in the last six months. As the trend toward organic food consumption slows after years of explosive growth, no sector is in direr shape than the $1.3 billion organic milk industry. Farmers nationwide have been told to cut milk production by as much as 20 percent, and many are talking of shutting down.

Certainly their own byzantine regulated milk pricing system (hardly an efficient market) isn't helping.  Nor is the ability of enormous dairies to produce milk very cheaply. But this final round of consolidation is even uglier than the hog or cattle consolidation due to the strong consumer attachment for cows.

Doubtless corn prices are one powerful factor in this grim picture, and despite glib assurances that corn farmers have ample productivity to supply the ethanol plants and our old customers like the dairy industry. What we are actually hoping is this supply is sold at much higher prices, regardless of the downstream consequences.

Feed accounts for 50 percent to 60 percent of the cost of producing milk. Escalating feed costs, fueled by the growing demand for corn to make ethanol, have eroded potential profits. [More]

Probably we can mandate more replacement corn markets as the meat industry shrinks, and arguably this could be a good thing for our diet. But the livestock industry is not fooled, and justifiably is feeling increasingly betrayed by legislators who took the corn farmer side for whatever political reason.

Grain producers are facing similar future, I think. And not many in the rest of agriculture will be sympathetic.

The turbines are the easy part...

More states and investors are seeing huge potential in wind farms as both an energy answer and an income opportunity.  Once again, a solution that has great visual appeal is mostly a mirage due to the two big factors.

First, our electric grid sucks.  No kidding. Even if we could generate power for pennies, we would not be able to efficiently get it where it is needed.  One reason is organizations you've probably never heard of, like MISO.

The Midwest Independent Transmission System (MISO), the organization in charge of the power lines, has to approve every new project that will connect to existing power lines. And MISO is only used to dealing with coal-plant-sized projects. Thus, the current regulations say that they must dedicate 2 years of their time to every project that will connect to the grid.
Not only that, but they're only allowed to process one application at a time.
This worked fine back when they were approving coal plants. Two years was plenty of time, and there weren't enough giant fossil fuel plants to fill their docket.

But a system that worked fine for fossil fuel has completely broken down in the face of distributed wind energy. People filing an application with MISO to build a medium- to large-scale wind project (of which there are currently over three hundred) have a heck of a wait in front of them. [More]

But it gets even better.  Because of the enormous queue and the rising value of MISO approval, many of the places in the approval line are actually occupied by speculators who intend to sell their spot, not build an actual power plant.  Add a few more dollars to the cost of "free energy".

Interestingly, another energy darling of the moment  - methane digesters - run into similar grid problems.

Second, wind is a flaky power source. Absent a smarter grid, the erratic power availability of wind turbines creates more of a problem for grid operators that an opportunity. As more wind farms are added, this unpredictability goes up, unlike steady-state, boringly predictable coal plants.  Guess which grid operators prefer to deal with?

Not only do turbines generate only when the wind blows, but their touchy electronic controls cause them to trip off-line at the drop of a hat. Consequently the nominal 40% of nameplate rating is more like 30% because of operational flightiness.

Now consider the standard for reliability for the grid is 99.5%.  Wind farms can't come close to that unless some storage (batteries, compressed air, etc.) capacity is included. 

So what happens when an erratic power generator is located too far from a large load to balance its fluxuations?  Strange energy economics.

A power producer typically gets paid for the power it generates. In Texas, some wind energy generators are paying to have someone take power off their hands.

Because of intense competition, the way wind tax credits work, the location of the wind farms and the fact that the wind often blows at night, wind farms in Texas are generating power they can't sell. To get rid of it, they are paying the state's main grid operator to accept it. $40 a megawatt hour is roughly the going rate.

For the first half of this year, power producers, mostly wind farms, paid the grid operator to take electricity for nearly 20 percent of the time. It happened 33 percent of the time in March alone and nearly 10 percent in October, said Mike Giberson, an energy business instructor at the Texas Tech University. He recently wrote about this issue in his blog, Knowledge Problem.

The industry parlance for paying someone to take the electricity is "negative pricing." It happens mostly when power producers bid the selling prices in the negative territory because they can afford to pay someone to use the energy.

Why? Wind energy producers get money for generating renewable electricity, but to qualify for these federal tax credits, the generation must be purchased and fed to an electric grid. As long as the money paid to the grid operator to take excess or "unwanted" electricity is less than the federal tax credit, the wind producer can make a profit. [More]

Wind farms need to be crowded around population centers rathet than stuck in the outback of ND, for example, because we can't move power easily.  A patchwork of ossified regulatory bodies like MISO ensures a sluggish response to any effort to reshape our nation's energy policy.

Even more valuable than transportation infrastructure would be greater investment in  electricity infrastructure, a smart grid.  Consider that in 2003 a massive, widespread, power outage threw 50 million people in the Northeastern states and Ontario, Canada out of power - disrupting lives and the economy.  Why did this happen?  Because of a failure to "trim trees" in Eastlake, Ohio - now that's a dumb grid.  And remember that only a few years earlier, the most innovative, high-tech industries in the world were shut down by blackouts caused by our primitive electricity grid.  Overall, blackouts cost the U.S. on the order of $100 billion a year.
The smart gird is a not one idea but many technologies such as real-time pricing (smart meters), superconductive smart cable, and plug-n-play architecture that combine to produce a grid that is decentralized, self-healing, robust, and smart for both producers and consumers.  Decentralized power, for example, makes it easier to isolate problems, "route" power to different areas, and maintain robustness in the face of falling trees and other problems.  Plug and play architecture means that new technologies such as electric cars can be automatically used as both consumers and producers (via storage) of electricity, as needed, on the fly.  Plug-n-play, the open-source of electricity infrastructure, will also open the field of electricity generation and storage to far greater innovation than is possible now. [More]

What this means is if we are not careful, all the billions of stimulus/energy dollars we're about to pour out could simply create more boondoggles like we see in wind farms and ethanol plants, if we don't address some way to get the energy to users, and clear regulatory arteries to handle new technology flows.

The problem for farmers will be lifting their eyes to a more distant horizon that may not include a monthly turbine/digester check, but rather enrich the whole power infrastructure.  At the same time, when transmission lines or access roads are surveyed, we need to consider our responsibility to generations ahead.

Memo to US Dairy Industry...

Call Finland re: butter advertising.



[via blort]

I'm not sure indignation is the best response...

Corn growers are feeling picked on, I think. Jim Dickrell's editorial in Dairy Today triggered a garbled-message response from Randy Woodruff of the Wisconsin Corn Growers. First, Jim's point:

The only good news is that the shine might be off many new ethanol plants as production starts to meet domestic ethanol requirements. With 140 billion gallons of mobile fuel used annually in the United States, the 10% ethanol standard suggests demand will mature at 14 billion gallons. Boehlje projects we could reach that level sometime next year.

The Federal ethanol credit of 51¢/gallon translates into an additional $1.60/bu that ethanol plants can bid for corn. That $1.60/bu subsidy literally pumps $8 billion into corn growers’ checking accounts—or twice what the new Farm Bill would send out in direct corn payments to growers.

And with those kinds of returns, farmers are planting more corn. That’s driving up the demand for seed corn, nitrogen fertilizer and even combines. [More]

Jim's relatively mild recitation of the facts fired up the talking-point machine for Randy.

Higher grain prices mean taxpayers aren’t supporting farmers via commodity program payments. U.S. tax payers shouldn’t be subsidizing food companies with billions of dollars in farm programs that sustain below-cost-of-production feed and help keep U.S. farmers on government welfare. This year alone, Federal support for farmers dropped by well over $8 billion thanks to higher corn prices.

Truth is Americans enjoy the safest, most abundant and affordable food supply in the world and even with higher feed costs, today’s efficient dairy farmers can succeed.
Wise up and admit your mistake, Mr. Dickrell. You, Dairy Magazine and the entire Farm Journal Corporation owe us an apology. Ethanol is good for us! [More]

Apologies are all the rage today. This blog won't be where the apology is published, BTW. The sad thing for me is the lack imagination for new justification. Corn growers ares till using the "poor-old-farmers" motif as their public image even as most of us see our profit level triple or quadruple. (We're buying the $8000 ground, ya know).

The idea that ethanol (mandated and subsidized) saves taxpayers money by lowering other subsidies paid is like a bully saying because I'm busy punching you in the face, I don't have time to kick you in the shins. Farmers neither need nor deserve any of these subsidies. If ethanol was a good idea economically it wouldn't need a law to make the numbers work, and as I've said recently this is the great fear behind the increasingly worried voices of the ethanol industry: any glitch in the government largess and the whole thing could collapse. This is the pressing need for this industry - to get off subsidies as soon as possible and let the market allocate scarce corn supplies.

And I love the "most abundant" refrain. How do we measure abundance? Is there an Abundance Index? How do we know we are number 1? Who's in second place, for example? Is food more or less abundant than 2007? This is a pretend statistic. And ditto for safety. Show me any comparative food safety statistics between nations. (I've looked)

Ethanol has at any rate made corn "less abundant". It's not moving to $7 because we've got surpluses sitting around. And perhaps the corn grower memo hasn't gotten to WI yet, because growers are frantically trying to put de-link corn prices and food prices - not assert a cause and effect.

Perhaps Randy doesn't use profit center accounting. My guess is if he did, he would discover he's not adding value to his corn, he's losing money turning it into milk. This is the point Jim was making, I believe, for other dairy farmers who used to be valued corn customers.

When we have decimated our domestic livestock and dairy industries, put thousands of small meat, milk and egg producers out of business, we corn growers may finally realize our ethanol intoxication enriched us at the cost of our best friends.

A close second...

Sometimes being the runner-up has an advantage. Consider this example: our dairy program.

Not only is the marketing scheme barely comprehensible, the pricing mechanism would make a Dickensian attorney proud. But even with that, our cousins in Europe make us look practically like a free market.

Perverse effects abound. German farmers from the plains of Schleswig-Holstein would “love to see no quotas”, says an official. Yet the German government is resisting reform. This is said to be because the German farm minister is both ambitious and from Bavaria, a hilly place with lots of small farms. France fell far short of its quota last year, thanks in part to a system of state planning that ties quotas to individual regions, to prevent concentration of the industry in profitable areas. In practice, this means that frustrated dairy farmers in Brittany and Normandy cannot expand, while quotas languish unused in other regions. French officials proudly proclaim that EU quotas are the reason that milk is still produced in every corner of France.

This is all especially pleasing to Michel Barnier, the French agriculture minister. He is from the Alps, and likes to say that one EU priority must be to save European palates from industrial, “aseptic” food. One Eurocrat says more bluntly that the French have “decided to save mountain farmers by kicking farmers in Brittany”. And while gourmet France under-produces, industrial America has been “flooding” world dairy markets, he adds: perhaps not the outcome France had in mind. [More]

The irony is, as we are poised on the brink of a possible decade more of our dairy policy, the EU is moving glacially in the direction of limiting payments and policy reform.

Or not.

If we are gaining market share from the quota-bound Europeans, we can only imagine how fast free marketeer competitors like New Zealand are expanding to serve the expanding Asian market.

rBST and me...

This reply from a reader:

I find your comments of Feb. 2 provocative and disappointing enough to respond to but don't know how to blog-do with this what you may. [I realize now this is not obvious. My bad. Please read the "Frequently Asked Questions" in the right sidebar]
Quoting and then responding to the blog.
"doesn't deliver much utility to the ultimate customer..."
If the premium being paid for milk produced without rbst is left intact, over the US milk production this premium amounts to the amount of money required to provide health insurance to 5 million children. [Yes, and it could be used to fund a bridge in Alaska or acquire a much needed closer for the Cubs - but it won't be. Are you saying that rBST does pay health premiums?]
We may agree that this premium is paid for no value received. To say that this does not warrant a public policy discussion is like saying that the speed limit is unconstitutional. [I believe the discussion occurred at the dairy case already]
"much of the value of rbst is captured by Monsanto..." How is this less fair than if all of the premium is captured by the processor/retailer? [Please finish the paragraph - I do not mention unfairness. My point is from what I have been told, the economic gain was not spectacular. Your results may vary.]
"other shrewd dairy operators..." equally as shrewd as the consumer who buys the product...how do these producers benefit? [Umm, a 79-cent premium?]
"causing people to go hungry is a leap..." not everyone on this planet is as wealthy as those on TV. I would venture that 80% of the people on this planet are making hard choices today caused by the price of food and fuel. I understand what you say about pricing mechanisms but ultimately cost is determined by resources consumed. Milking more cows to feed the same number of people has an economic and environmental cost. Recognizing this is called leadership. [Compared to ethanol mandates, rBST is a drop in the bucket as a food cost driver, IMHO - and I'm pretty sure I can back that up with numbers. Obviously, the gain must be less than 0.79/(farm milk price) percent or the premium would be higher. That says to me it's what, about 4% productivity gain?]
"not the end of the world either way...." rbst is an incremental part of a quantum idea-feeding the most people with the fewest resources. [True, but still incremental, not crucial]
"the dairy industry has enjoyed the support..." More so than the corn and bean growers in Chrisman, Illinois??? [I'll assume you haven't read any of my work for the last 14 years or so. I do not support the government sending me money. Or you. Click on "farm program" or "farm bill" in the Label sidebar for way too much on my subsidy position. Or watch this]

I don't want to pick a fight with my customers. I am willing to accept that the customer is always right when I can hear their voices, and they mine. The complaint is that the processors and retailers have stepped over the line and drowned out the conversation. Where choice is available, our customers have said that they would like 1 of every 50 cows to be organic. Retailers are asking us to accept that the other 49 each want their food produced without technology. [Not wanting rBST is not the same as wanting organic - this is a false comparison. I think consumers just don't want this technology.] I am not convinced. I accept the fact that I have allowed this to happen. I want strongly to change that and I will.
I am most appalled because you have directly picked a fight with your customer. When the buyer who buys your corn and beans demands that you produce it without biotech (without asking me if I care) and then collects a premium in selling it to this livestock producer( which he does not pass on a fraction of to you) how will you react? [That didn't happen, did it? Which leads me back to the point that this is perhaps a pricing error on Monsanto's part. Also remember, grain GM passes through an animal mostly rather than straight to the consumer, so the analogy is strained at best.]
Agricultural producers will not build trust with our customers if we are quietly complicit in this rip-off any more than we will when the public wakes up on the biofuel mandate debacle. [Oddly producers not using rBST seem to be winning the trust of customers, it seems to me] I grow more corn than you do but never waste a chance to admit in public that I am aware that the mandate is a crime against humanity. [Again, click on "ethanol" for my position on mandates. I am obnoxious, but try not to be hypocritical on government farm policy]
I do this(farm) for profit and for pride in delivering fair price for intrinsic value to my customers. If I do not act, the pride will be gone. A golden parachute(graceful dismount agricultural is your term) is not worth sacrificing your integrity over. [My guess is we both will be around with approximately the same amount of integrity with or without rBST, but perhaps it is the Great Litmus Test of farmer character. In which case, I fail, and you win...what, exactly? Despite which of us has the moral high ground, I see no persuasive economic evidence, especially when comparing to dairies like Fair Oaks that this controversy is a crippling blow to the dairy industry, but I could be wrong. Tell you what, I'll flag this and re-check the situation in a year.]

[My answers]

Economics is too a science...

The flap over rBST is remarkable for the extreme partisanship of the two sides and the relative ignorance of the economic principles involved. Also for the profound irony.

Consider this comment from Orion Samuelson:

For whatever reasons, among them perhaps financial, dairy processors and dairy marketers at the retail level label their milk hormone-free, and then raise the price. If you check the price of milk that is labeled “free of rBST” you will find the price is considerably higher than regular milk. In the second quarter of 2007, the Farm Bureau Market Basket Survey showed the price of a half-gallon of whole milk to be $2.22, the price of a half-gallon of milk labeled rBST-free was $3.01, a 36% premium for milk that is no different. I doubt if any of that 79-cent premium reached the producers who signed the “no rBST affadavit to satisfy the demands of the processor.

Golly, I share this frustration. My bet is people who make these decisions at Wal-Mart have never milked a cow; have never been involved in food production and give little thought to what stopping the use of technology in food production will do to hungry people around the world. It will literally take food out of their mouths.

This is a wrong decision by the dairy processing industry, because if you can’t test it, how can you label it? Agriculture must come together on this one, and spend time every day educating people, both in the industry, as well as consumers that science, not emotion or financial gain must be the benchmark when evaluating the use of technology in food production. [More, albeit gated on Pioneer's website]

The use of bovine growth hormone to increase milk production is clearly safe and effective. But dairy producers seem to forget it doesn't deliver much utility to the ultimate customer. While is could be argued (feebly) that its use helps lower the cost of milk, the milk market is so perverted by arbitrary pricing mechanisms, economists would have a hard time proving the point. (Ring any bells with GM grain producers?)

But any fractional lowering of the cost of milk would be indistinguishable from a myriad of other market price factors, and hence, of no discernible value to consumers. Seriously, what's in it for me?

Moreover, from what I have learned talking to milk producers, much of the value of the efficiencies the practice generated were captured by Monsanto, similar to seed traits. I fully support this right, but in some economic lights this whole brouhaha could be little more than a mistake in pricing by Monsanto. Had they gone for a much lower margin, allowing producers to reaps more margin, adoption of this technology would have been wider and faster, and maybe could have forestalled customer rejection since the overwhelming bulk of the milk supply would have been rBST milk. (See also: soybeans, GM)

However, other shrewd dairy operators have discovered NOT using the hormone does offer a value to consumers. It looks like about 79 cents worth.

On my way to and from South Bend, I pass the ginormous Fair Oaks Dairy (mucho-cool website) on I-65. In that past few months their billboards are using the slogan, "Everything you want in your milk, and nothing you don't" (or something very close to that). Given the ferocious battle over what you can and can't say about milk, I thought this was brilliantly weaselly public communication.

It would be helpful too, if the dairy industry had more competition at the processor level instead of the arcane quasi-monopsonies maintained by our dairy program. But when your processor says X, you do X. And this appears to be the way dairy producers want it to stay. That's their call too, all though I would just as soon not fund it with tax dollars.

Bashing Wal-Mart is always a cheap thrill, but if you are also bashing Whole Foods for ephemeral organic claims, who's left? The buyer at Wal-Mart doesn't need to know what end of a cow is which. What he/she needs to know is retailing, and you can bet your bippy Wal-Mart has some pretty solid evidence this move is good for their bottom line.

Fellow AgWeb blogger Chris Galen adds a more realistic view, I think:

And the reason why? It’s the same as the answer to the question of why did the chicken cross the road? Because it can. Or, in this case, because they can. Retailers and processors have the ability to call the shots, and can push suppliers to provide the product they demand. It may not be fair to farmers using rBST, but when you’re the low man on the totem pole in the food supply chain, and when the clout of retailers is such that a mere five of them (Wal-Mart, Supervalu, Kroger, Safeway and Ahold) control more than half of the collective grocery marketplace, the decisions you have to make to keep your marketing opportunities open are sometimes not your own. [More of a thoughtful analysis and backstory]

As for not choosing to use rBST causing people to go hungry, that seems to be a reach. Wasn't milk cheaper before the days of rBST? Regardless, the dairy industry itself argues that prices are high because of unprecedented demand and ethanol-driven feed prices. At worst, we add a few cows to the herd to make up for lost production, and Monsanto loses a small cash cow (no pun intended - I think).

Not the end of the world either way. rBST is an incremental - not quantum - production leap.

Agriculture need to think carefully about lecturing consumers on their choices. Insisting on sound science should include the science of economics.

The dairy industry has enjoyed the support of taxpayers for years by exploiting the economic principle of widely distributed costs ("less than 1% of the federal budget" or "only XX cents per person per day") paying for highly concentrated benefits to a relative handful of producers.

The struggle over rBST illustrates a widely distributed good (slightly cheaper milk - maybe) is just as hard for consumers to get excited about in the face of a perceived risk - a concentrated cost. Most importantly, rBGH supporters could have done their homework on studies about what risks people will allow their children to endure (basically an irrational zero). This principle is widely accepted and it was curious marketers thought they could overcome it with any amount of advertising.

Some battles you win, some you lose. Only I think this battle is more of a hissy-fit. And maybe picking fights with customers isn't such a good idea in the first place.

Sweet mother of pearl!..



Farm Journal smashes the cool barrier.

Imagine my surprise to see Dairy Today cited in one of the nation's top political blogs: Andrew Sullivan. It seems their new covers are tray sheek.



Well done to Allen and crew!

Hard to tell how this will end...

I have been watching the raw-milk flap for a few years, but apparently it may be gathering some momentum. 2 Blowhards have a good summary.

A little background: In most states, it's against the law to sell or buy raw (ie., unpasteurized and unhomogenized, straight-from-the-cow-or-goat) milk because of fears of contamination. Yet some people feel that raw milk isn't just ultra-tasty (having tried raw milk, I agree wholeheartedly with this verdict), it also benefits their health.

So: Perhaps the sale of raw milk should be strictly prevented on public-health grounds -- public-health grounds that we're justifiably proud of, and that we should be completely unyielding about. After all, in pre-pasteurization days, tons and tons of people used to get sick because of milk-borne infections. On the other hand, why shouldn't freedom and liberty prevail whenever possible? Provided that the public is made aware of the risks, why shouldn't people be allowed to conduct business as they see fit? After all, if we permit the sale of cigarettes ...

The controversy seems to be emerging as a newsworthy one. (Here, here.) An informal coalition of hippies, home-schoolers, health buffs, libertarians, local-farming fans, and foodies are pushing the freedom-and-raw-milk cause, while governments are cracking down so hard on the raw-milk scene that they're beginning to make some people think, "Good lord, it's Waco all over again." And editors and policymakers are beginning, if reluctantly, to take note. Whee! [More]

I am always leery of gushing claims for "alternative food". Organic fruits/veggies haven't impressed me. (In fairness, fresh from a garden stuff does.) But I agree this can be seen as a nanny-state intervention into lives that is both unneeded and market-distorting.

However, milk marketing in the US is already a sad display of market perversion firmly controlled by firms who defend the status quo via political power. It could be a narrow issue like this one, made possible by wealthy, picky consumers constitutes an asymmetrical challenge to the hegemony granted by marketing orders and allotments.