Alltech Dairy School guides producers in navigating the future of the industry
GREEN BAY – Dairy producers make many important decisions about their operation based on current markets and their best information about where the markets are trending.
Mike North, founder of the former Commodity Risk Management Group, which is now known as Vault Ag Holdings LLC, offered the more than 200 producers and other industry professional valuable insights into market trends during the opening session of the recent 2019 Alltech Dairy School held at Lambeau Field.
North was raised on his family’s dairy farm in southeastern Wisconsin. Now he and his team work with production and processing clients throughout the U.S. to construct marketing plans and margin management programs. He is a regular guest on several national programs such as AgDay, RFDTV and the U.S. Farm Report.
Focus on cost of production
“As we talk about this whole concept of marketing and risk management, there are some important things we need to look at. You need to know your cost of production, or what it takes to make the milk you’re asking us to market,” North emphasized.
“We offer a platform that basically drills down, breaking down the milk check, and examining what goes on in your operation and what you should expect looking forward with milk prices,” he said.
“The bottom line is that you need to figure out cost of production because without it everything else is meaningless. You need to know what it means to you to have $17 milk or $15 milk, or $20 milk.”
North acknowledged that 2019 has been a crazy year for producers. He noted there are four main drivers of market prices: weather, international markets, government policy and supply and demand.
He focused primarily on trade and supply and demand because these are the areas where producers can actually have some impact.
“Looking back on exports, we did a little bit better on cheese, we killed it on powder, and we really sucked some wind on whey,” he said.
“When we think about the export markets, we tend to think about a dairy product; we love to talk about cheese and we love to talk about butter. But when you talk exports, it is not a product market, it is an ingredient market for a lot of different reasons,” North stressed.
“It’s not easy to ship water, in fact, it’s pretty expensive,” North explained. “And not everybody around the world shares our taste for products; they want ingredients they can build in to their own products. So we spend a lot of time shipping powder and whey to other countries, which are our big categories.”
September 2019 was a pretty good month for exports, according to North. “As we talk about the global situation, powder production has been on the rise, but during the past few months we’re seeing a deficit there. Foreign governments bought record stocks but now have gotten rid of some of that,” he explained.
During the second half of 2020 he expects to see a surplus of powder, and the market could soften over time.
“Butter supplies are high and we’re continuing to push out more butter than the market is asking for, and that’s going to continue to pressure farm prices,” he said. “We had one of the largest October inventories in history. High U.S. butter prices are also responsible for butter being imported from other countries.”
African Swine Fever effect
North reported that U.S. dry whey supplies are currently at a surplus due to the outbreak of African Swine Fever in China. “Going back to last year, it was common to have 48-cent, 50-cent prices,” he noted.
“The Chinese hog herd is five times the size of the United States herd,” said North. “But as we came into January 2019, we were talking about a 20% drop in the Chinese herd, and that’s the equivalent of losing the entire U.S. hog industry.”
By May projected losses had doubled, and the Chinese herd was down by 40%. “Piglets are the number one consumer of whey protein in China, and whey prices fell through the floor overnight,” North said.
“The good news is the Chinese hog herd is starting to rebound, and whey is right at the top of ingredients that piglets need in a healthy diet,” he explained. “Prices are back up to around 36 cents, so this is an improving market again, but we still have a lot of inventory that was carried over from the last year.”
According to North, the U.S. cheese supply is currently a bit lower than where the demand has been, and that really has played nicely into the markets.
“If you look at daily production over the last four years, what you’re going to notice is that we’re on the uptick. We’re starting to move again into a place where daily production of cheese is outpacing that of previous years,” he said.
“We’ve had $2 cheese for the last three months and production is on the rise. We are not at the levels of 2018’s astronomical high inventory, but we’re still in a pretty comfortable spot,” he said.
There’s been a growing volatility between blocks and barrels, according to North. “In the past, prices were about within 3 cents of each other, but the price difference has swung wildly.
“The reality for all of us is that this market is going to stay wild, as consumption preferences change, as we get more engaged in the world market, and we talk more about the differences between these two camps, there’s going to a lot of volatility. This has been normal for the last seven or eight years,” North said.
U.S. cheese prices, compared to the rest of the world, are still very high. “This is the canary in the coal mine. “When we talk about the movement in perishable commodities, it is not all of the business that moves the market, it is the fractional elements that are marginal to supply and demand that move the market,” he stressed.
“It’s those last loads that make the difference. If I’m short one load, I’m going to chase after the market and drive it up. If I have an extra load, I’m going to chase after a buyer and drive it down. This is not corn, you don’t get to store it for three years,” North said.
North expects to see a cheese sell-off in 2020. “We’ve had two big sell-offs since September – a 20-center and a 35-center. Be prepared for that again,” he warned.
Although dairy herds are declining in some Midwestern states, North expects growth in the West and Great Plains. “We’re seeing large milk processing plants being built there, and the cows will follow the processing infrastructure,” he predicted.
North also sees a record demand for soybean meal in 2020. “If you see $300 soybean meal, you’d better be ready to move on that,” he advised.
He also advises producers to be sure they know how they're paid, in light of the various classes of milk, because they all play into your milk check every month. “In Wisconsin, we’re Class III heavy because cheese rules the day. You really need to know these numbers because we have so many tools available to us now.”
One of those tools is Dairy Revenue Protection (DRP) an insurance plan approved by the Federal Crop Insurance Corporation to allow dairy farmers to purchase risk management protection against declines in quarterly revenue from milk sales as a result of a decline in milk prices, a decline in milk production, or both.
“DRP a good tool and I recommend that everybody uses it," North said. They raised the coverage and cut the cost by 60%. This year you can buy $9.50 coverage for just 15 cents.”