Dairies booming on sales to China

Exports driving prices, profits up

Cows are milked at Hunter Haven Dairy Farm in Pearl City, Ill., in late January. Worldwide demand, higher production and falling feed costs are driving up profits for dairy farmers.
Cows are milked at Hunter Haven Dairy Farm in Pearl City, Ill., in late January. Worldwide demand, higher production and falling feed costs are driving up profits for dairy farmers.

In a year when most American farmers are expecting lower earnings than in 2013, U.S. milk producers are seeing incomes rise in early 2014.

Milk prices have never been higher, feed costs are down, and output is headed for an all-time high as exports surge to buyers from Mexico to China. While the average farm is projected to see a 21 percent drop in net cash income, led by price declines for corn, wheat and soybeans, dairy farmers on average will earn 28 percent more at $334,100, the U.S. Department of Agriculture predicts.

“Dairy farmers are making the best money they’ve made in many, many years,” said Peter Gutierrez, vice president of global ingredient sales for Agri-Mark Inc., a 1,200-member dairy cooperative in Methuen, Mass., that makes Cabot Creamery cheese and sells about 120 million pounds annually.

Milk futures in Chicago are up 24 percent this year and cheddar cheese gained 19 percent, with both reaching records in March. The higher prices are eroding profit margins for domestic purchasers including dairy processor Dean Foods Co., sandwich-chain owner Potbelly Corp., and Annie’s Inc., a maker of organic macaroni and cheese.

The USDA expects domestic milk output to rise for a fifth-straight year, up 2.2 percent to 205.7 billion pounds. At the same time, exports now account for 15.5 percent of sales, compared with 5 percent a decade ago, according to the U.S. Dairy Export Council, an industry group based in Arlington, Va.

Global economic growth is expanding the middle class from Asia to South America, boosting demand for dairy products including cheese and processed foods containing milk. U.S. dairy exports reached 162,999 tons in January, up 19 percent from a year earlier, as the value rose 35 percent to $583.7 million, council data show. Cheese shipments jumped 46 percent to 32,118 tons, with a 38 percent increase to Mexico, the biggest buyer of U.S. dairy products, and a doubling to China.

“The export market is very firmly in everybody’s mind, from farmers to processors,” said Peter Vitaliano, vice president of economic policy and market research at the National Milk Producers Federation. “No one really has dairy surpluses anymore.”

Demand is expanding in China, the world’s most-populous nation with 1.355 billion people, which overtook Japan as the world’s second-largest economy in 2010. China’s dairy imports probably rose 30 percent last year, Yvon Guerin, the chief executive officer of Parmalat SpA, an Italian dairy processor, said during a March10 earnings call.

Chinese dairies have been unable to keep pace with rising demand, and the pace of import buying has “caught a lot of people off-guard,” said Bill Schiek, an economist with the Dairy Institute of California. California is the largest U.S. milk-producing state. “The number of cows, as best as we can tell, is down, which has left a huge hole that they’re trying to fill.”

Class III milk futures, which track a variety used to make cheese, touched a record $24.15 per 100 pounds on the Chicago Mercantile Exchange on March 24. That same day, a 40-pound block of cheddar reached $2.4325 a pound, the most since the data began being collected in 1997.

Dairy costs tracked by the United Nations are the highest since the data began being collected in 1994, after climbing 9.8 percent in the three months through February, outpacing the 1.2 percent gain for all foods.

“These unusually high raw-milk prices are an undeniable headwind for our business,” Gregg Tanner, chief executive officer of Dallas based Dean Foods, said in a Feb. 11 earnings call. While the company’s costs may rise by as much as $600 million this year, any increase to consumers has to be weighed against the risk of “letting prices get so far out of whack that people just stop buying milk,” he said.

Higher cheese costs are contributing to a “tough commodity inflation environment” at Berkeley, Calif.-based Annie’s, Zahir Ibrahim, the chief financial officer, said March 13 at an analyst conference.

Dairy costs are “a concern” at Seattle-based Starbucks Corp., the largest coffee-house chain, said Troy Alstead, the chief operating officer. “You’re not able to protect it more than a handful of months going forward,” he said in a March 19 interview. “It’s a very thin market in terms of futures.”

Rising output may overwhelm demand. New Zealand, the largest dairy exporter, expects a 4.5 percent rebound in production in the year ended May 31 after the most widespread drought in three decades. European Union production will grow 2.6 percent in the first six months of the year, according to Rabobank International.

Fonterra Cooperative Group Ltd., the world’s largest shipper of dairy products, said it will boost capacity to process more milk into powder, which is the primary form of dairy exports. The Auckland, New Zealand based company “processed as much of this milk into the higher-returning milk-powder streams as we could,” Chief Executive Officer Theo Spierings said in a statement.

Production unexpectedly rose in California, where drought conditions have led to water shortages and higher feed costs as pastures dried up. The state’s 5.3 percent increase in February to 3.4 billion pounds was second only to the 6 percent gain in Colorado.

The dry conditions have been ideal for cows, helping the seasonal “spring flush” begin sooner than usual, according to Tom Barcellos, a dairy farmer in Porterville,Calif., with 1,300 cows. His herd is producing a record 13,000 gallons a day, and one of the two plants he sends his milk to has sent notices that it is nearing capacity.

So far, demand for dairy products remains strong. Demand from overseas is forecast by the USDA to boost industry sales by 7 percent this year to a record $43.1 billion.

While exports are rising, domestic demand is shrinking. U.S. per-capita consumption of fluid milk has been dropping for at least the past four decades, down 25 percent since 1975, according to the USDA.

However, prices have already begun to retreat. The weighted average price of nine products traded at the Global Dairy Trade, which serves as a worldwide benchmark, dropped 8.9 percent from two weeks ago to $4,124 a ton last week.

“We’ve seen our peak for the year here in the first quarter” for Chicago milk futures, said Katelyn McCullock, a dairy and forage economist at the Livestock Marketing Information Center in Denver. “Milk prices are going to decrease throughout the year.”

Dairy products are still a relatively good buy, according to Bob Cropp, a dairy economist at the University of Wisconsin-Madison. “The market will sustain a higher price than it used to.” Information for this report was contributed by Leslie Patton of Bloomberg News.

Business, Pages 71 on 04/06/2014

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