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Views on Western Dairy By Jim Gruebele

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                           Views on Western Dairy
                              By Jim Gruebele
January 11, 2008



Tilt Effect

The USDA announced a tilt in the support price for butter and powder effective on November
15, 2002. The California weighted average price of non-fat dry milk powder increased from
.9102 for the week ending November 29, 2002 to 1.7673 for the week January 4, 2007.
Remember, all sales up to 150 days are included in the California Weighted Average Price,
including long-term contract sales, but the NASS Survey price is more restrictive. The contract
sales that run more than 30 days are excluded from the NASS survey. The price differences have
narrowed between the NASS survey price and CWAP. The Domestic powder market has
weakened and powder inventories continue to grow. The dry whey markets are weakening. In
fact the futures market for April 08 were less than 30 cents per pound.


RECENT DEVELOPMENTS IN MILK SUPPLY

As in the last several months the weather conditions have been excellent. There has been a little
rainfall in December but it has not been enough to affect milk production adversely. The recent
snowfall in the mountains have been very welcome. The water level is at historic lows in
Folsom Lake. If there is another drought there will be severe repercussions for California
agriculture. But the combination of good weather and strong milk prices is expected to result in
strong levels of milk production for December. The days in milk is growing again because the
major freshening period was in July and August. The feed prices and roughage prices remain
high; but the higher prices of feed are more than offset by higher producer prices. Total
production for November was up by 5.5 percent and that was somewhat lower than I had
predicted. The production for October was up by 5.8 percent.

Again, part of the reason for the stronger milk supply on a month by month basis this year is
because the cows had suffered stress during the summer months and that affected milk
production for much of the remainder of 2006.

Milk production would be even higher this year than last but the use of bst continues to be under
pressure. The retail trade is discouraging the use of bst.

Cow numbers in October were up by 47,000 cows. This represented a 2.6 percent increase.
Production per cow was up by 2.8 percent. Because of the excellent weather conditions and high
milk prices in December, I expect milk production for December 2007 to be about 4.5 percent
above December 2006. This will reflect continued growth in cow numbers as well as increases
in milk output per cow. This production growth is expected to occur in spite of the increased
pressure to reduce the use of bst. The indications are that production slowed down for December
2007 versus December 2006 relative to November 2007 versus November 2006. The main
reason was that milk production was stronger in December 2006 than November 2006.
Although there was some rain in December 2007, it was not enough to explain the differences in
the relative production levels.

Secretary appoints whey formula committee

The California Department of Food and Agriculture announced the Secretary of Agriculture’s
decision on the Class 4a and 4b hearing that was held on October 10th and 11th. The California
producer sector reacted negatively to the decision. Several letters were sent to the Secretary of
Agriculture calling a reconsideration of the decision. Those petitions for reconsideration were
denied but the Secretary of Agriculture subsequently appointed a special committee to discuss
alternative ways to reflect the whey value in the Class 4b formula (milk for cheese).

As mentioned last time, the Secretary replaced the whey portion of the formula with a fixed 25
cents per cwt. The net result of this decision, assuming the average whey price at 45 cents per
pound, was about 80 cents per cwt. Assuming an average whey price of 45 cents per pound, the
Class 4b price would have been about 80 cents higher for 2008 had the original whey
portion of the formula remained in place. Changes in the whey portion of the formula is
expected to affect the net blend price to producers by about 37 cents per cwt for 2008.

The over-riding reason for the decision on Class 4a and 4b hearing was that there is currently a
critical imbalance between the supply of milk and manufacturing capacity in California
California definitely has a need for additional manufacturing capacity. California’s milk
production is significantly higher this year than last year. In fact, because of the increased milk
supply, California has an additional 5 million pounds of milk per day in 2007 than in 2006.
Rumors are that milk is being dumped and some of the milk continues to be marketed
out-of-state at a huge discount. This means that the out-of-state plants that are buying distressed
milk from California have a significant cost advantage over California cheese operations. It is
difficult to defend a state regulated program when milk is dumped or marketed out-of-state at
sharply lower prices. California Dairies Inc. will be opening a new powder operation in
Visalia, California early next year. But Dairy Farmers of America announced the closure of a
large cheese operation in Corona, California. The closure of the Corona plant just about offsets
the increased manufacturing capacity of the CDI plant. California is facing a crisis because of
the lack of plant capacity. The January 4th issue of Dairy Market News stated that “milk
production is strong across California. Processing plants continue to receive very heavy volumes
of milk as capacity is being stretched. There are more reports of milk not able to be processed.”

The CDFA decision could prevent the closure of additional cheese plants. Perhaps, once the new
pricing program is in place for awhile, it might encourage additional manufacturing capacity in
butter, powder and cheese in California. Of course, all this could change again if the specially
appointed committee recommends a change to the Secretary of Agriculture to change the
formula back toward a whey factor that changes with the whey market and ultimately results in
higher Class 4b prices again. Of course, even if the industry committee recommends such
changes it would be necessary to call a hearing to make such changes in the Class 4b
formula again. Such a change in the Class 4b pricing formula would likely discourage the
construction of new cheese manufacturing plants in California.
Alfalfa situation

California had the highest alfalfa hay prices in the nation during 2007. Two factors were the
high milk prices, particularly in second half of the year and tighter supplies of hay. One of the
major factors for high hay prices was the fact that 100,000 fewer acres of alfalfa hay in
California in 2007. California suffered from drought and that was a very important factor in
fewer acres devoted to alfalfa hay. Another reason was the high corn and wheat prices led
farmers to devote more acreage to those crops at the expense of alfalfa.

Expectation for 2008

Record high alfalfa hay will not necessarily result in significantly more acreage in alfalfa.
Growers have the most crop options since the mid-1990’s and this along with irrigation water
uncertainties could temper the increase in alfalfa hay acreage. In addition, some imperial
growers are switching to Durum wheat and Durum acreage could double in from 2007.

Seth Hoyt predicts that alfalfa hay acreage will not change much from 2007. Wheat will
displace alfalfa hay because of the strong wheat market, lower planting costs and lower water
use. But alfalfa hay on a net basis could be higher in 2008.

It should be another year for strong imports of alfalfa hay from other states as California hay
supplies should still be tight in 2008.

Source: Seth Hoyt, California Agricultural Statistics Service, California Dairy Review Volume
12 Issue 1, January 2008

Alfalfa Hay Prices

The price for premium and supreme alfalfa hay prices were steady with light supplies and good
demand.

Premium and Supreme alfalfa hay delivered to the South Valley was $220 to $248 as of 12/2107.
These prices were the same as last month.

Source: California Dairy Review Volume 12, issue 1, January 2008.

DEMAND SIDE

Whole milk sales for the period December 2006 through November 2007 were down by 3.7%
compared to a year earlier. Reduced fat sales were up by 2.3% for the same period. Low fat
milk sales for the same period were up by 6.1% and skim sales were up by 2.0%. Half and half
sales were down by 5.4% and total class 1 sales were up by 0.5% for this period. The production
of total cottage cheese was up by 13.6% for January 2007 through November 2007 compared to
the same period in 2006. The production of full fat cottage cheese was down by 2.8% for
January through November 2007 compared to the same period in 2006 and the production of
nonfat cottage cheese was up by 9.1% and the production of low fat cottage cheese was up by
23.7% for January through November 2007 compared to the same period in 2006. The
production of sour cream and sour cream dressing was down 1.9% for January through
November 2007 compared to the same period in 2006. The production of yogurt was up 2.9%
for January through November 2007 compared to the same period in 2006. Ice cream production
was down by 1.0% for January through November 2007 compared to the same period in 2006.
The production of ice milk was down by 9.4% for the same period. The production of frozen
yogurt was up by 42.0% for the period January through November 2007 compared to the same
period in 2006. The production of total frozen dairy products was down by 1.0% for January
through November 2007 compared to the same period in 2006.

Quota price

 The California Department of Food and Agriculture announced that the quota price for
November 2007 was $21.93 per cwt and the overbase price was $20.23 per cwt and that was 77
cents higher than the October 2007 price. The overbase price for December 2007 is expected to
increase to $19.12 per cwt and the quota price is expected to be $20.82 per cwt. This would
mean that the December 2007 prices would be $1.11 lower than for November 2007.

Class 1 prices

The February 2008 Class 1 price is $21.98 in Southern California and $21.71 for Northern
California. The previous month’s price was $22.96 per cwt for Southern California so the Class
1 price for February 2008 is $.98 lower than for January 2008.

Weather Update

The good news is that rainfall for early January 2008 has been heavy. In fact, the total rainfall
for the year is now above normal for the Sacramento region. The additional snow in the
mountains is very impressive. This is good news for agriculture. However, it is entirely likely
that milk output for the first week in December has been negatively impacted by the heavy rains.

				
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