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Check Letter Monthly News and Information

December 2012

Milk Price Update During the past month, dairy prices have declined from their historical highs and the price-strength exhibited in early fall has subsided. The decline occurred in both the CME cash cheese and butter markets which impacted nearby December and the first quarter of 2013 futures prices, and occurred when the November/December holidays buy-in finished. In the fall, dairy manufacturers were gearing up for the high-demand holiday season. As the Thanksgiving holiday passes, demand eases and causes supply of product to increase which in turn can pressure dairy prices lower, similar to this year. Beyond the current pricing dynamics, the fundamentals within the dairy industry indicate the possible continuation of tight margins. Tight margins would obviously keep the U.S. dairy industry from entering into an expansionary trend for milk production. The CME Class III futures forward curve indicates milk prices strengthening in the summer and fall months. Tight producer margins will be the strongest factor in whether this forward curve holds. The U.S. dairy herd continues to decline; however, milk per cow levels are rebounding from the effects of late summer heat. Milk production levels for the U.S. are hovering near unchanged from the prior year and the expectation is for this to continue for the next several months. Weather around the country has been “mild” to date, much like it was last year when the new year brought with it a lot of extra milk production. In many of the Western states, the cost of purchasing feed remains high and will likely continue until there is a better idea of the prospective acres for corn and soybean plantings in 2013. Demand for oilseeds remains high which has supported the CME soybean futures. This trend is anticipated to continue as the South American soybean crop remains in question due to excessive rains in Argentina. Demand for corn is not nearly as strong as in the soybean market, but the corn market is facing the tightest ending stocks situation in nearly eight years. In areas where a majority of feed is grown, concerns regarding drought are still present even as harvest has concluded for the year. The Midwest has continued to face drought conditions through the fall and early winter months. The lingering drought will be a key factor in the corn market in early 2013. Soil moisture levels will significantly influence feed prices as we roll through 2013. We still believe there will be feed rationing as we enter the spring as some livestock businesses use up their home grown feed and come to the marketplace looking to supplement their needs. The high costs of inputs as mentioned above may limit excess milk production within the United States however, global milk supplies remain strong. New Zealand is moving past their peak season but remains several percentage points above last year’s very strong milk production. However, weather issues in Argentina, Russia and (continued on page 3)

Washington, DC Update Conversations on a new Farm Bill continued behind closed doors the first week of December, as House and Senate Agriculture Committee leadership met to discuss a path forward. With less than two weeks left before the holidays, however, most of the activity in Washington, DC is related to addressing the fiscal cliff by the end of the year. House Ag Committee Chairman Frank Lucas (R-OK) spoke at an event recently and down played the prospect of a new five year Farm Bill during the Lame Duck session. He noted that it would seem more likely that a short term extension of current law would need to be passed, which would then allow the new Congress to work on the Farm Bill in 2013. Dairylea and DFA met with a number of Northeast offices on December 13th to urge legislators to pass a Bill before the end of the year. Whatever deal is cut relative to fiscal cliff legislation may impact the Farm Bill, as budget savings on the (continued on page 3)

Also Inside: CEO Perspective.............................2 Washington, DC Update Cont’d......2 Milk Price Update Cont’d................3 DMS Balancing..............................3 Heifer International Donation.......4 Winter Hauling Tips.......................4

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CEO Perspective Reflecting Back and Looking Forward The end of every year is traditionally a time for reflection of the previous year and an opportunity to look for ways to make positive changes during the next. This year was no different. 2012 was a challenging year for the dairy industry. Once again, milk prices were at historically high levels, while input costs associated with producing milk were also historically high, resulting in a pay price unsustainable to many of our farmers. In addition, farmers in our area that rely on growing their own feed were faced with an array of hurdles presented by mother nature - from Army Worms in early spring, to drought in the later months to a hurricane in the early fall. It’s no wonder that many farmers growing their own feed struggled to reap the yields for which they planned, forcing them to purchase additional feed and once again putting a strain on their bottom line. While 2012 was by no means another 2009, the volatility our members experienced with milk prices made profitable farming difficult and limited opportunity for farm reinvestment or growth. This just reinforces the need for dairy policy reform that is fair and effective for all dairy producers. The regulatory environment also presented a challenge to many farmers when the USDA announced new requirements for the European Health Certificate Program. Under the new regulations, all farmers were required to meet the EU’s somatic cell count standard of 400,000. This resulted in a need for some management changes on some farms but I am pleased to say that today we were able to assist our members so nearly 95 percent of our milk meets the regulation. The Northeast dairy industry also met challenges and opportunities head-on in 2012. During the week of the hurricane, we had more than 20 processing plant closures. These closures posed a definite challenge for milk movements throughout the Northeast. Milk was successfully rerouted and very little was dumped, proving the true value of our partnerships here in the Northeast. Without the strong network of haulers, customers and cooperative partners we would not have been able to handle the excess milk as a result of these closures. The cooperation saved our farms well over $1-2 million. We continued to see major commitments made in the processing community here in the Northeast as well with more than a half billion dollars invested in new processing capacity between Chobani, Fage, Alpina and Műeller. As I’ve been saying, this growth presents an opportunity for farms

to expand production. However, the circumstances above have resulted in numerous conversations that come down to this point; farmers will grow when the economic situation is sustainable for them to do so. We have participated in endless conversations on this very topic - how do we change the economic situation for farmers so that they can take advantage of this opportunity. This conversation continues and will likely continue throughout 2013. Any way you perceive it, the growth in processing is a positive for the industry and we, as an industry, have to decide how best to respond. Dairylea has also had a year filled with challenges and opportunities. Our farm service divisions partnered closely with DFA this year to market their services across the United States in association with DFA members. The result was a significant increase in sales and good momentum going into 2013. Additionally, many of these services experienced expansion within their product offerings. For instance, Eagle Dairy Direct expanded their commodity offerings to 200,000 tons in 12 months and Agri-Services Agency (ASA) expanded its product offerings with an increased focus on Property and Casualty insurance services. Finally, the Board started a process of reviewing our strategy and really exploring where we want and need to be over the next five years. While the Board goes through this process every year, during 2012 this process was more in-depth and has resulted in detailed conversations about the best ways to deliver the most value to our members both in terms of dollars and cents, but also in terms of operational efficiencies, expanded services to our members and a stronger voice in policy-making. These conversations continue and will likely be a focus in 2013. Looking forward to 2013, we will continue to work on these and other initiatives to bring more value to our members. As for milk prices, it is likely that 2013 prices will continue to experience volatility which furthers the need for reform. I wish you all the best for a happy holiday season complete with family and friends.


December 2012

Washington, DC Update Continued Bill could be used to offset the cost of addressing components of the fiscal cliff. It is a very fluid situation that will surely be taken right down to the wire. In other news, newly elected Congressman Chris Collin (R-NY) was named to the House Ag Committee this month. With the addition of Collins, the number of Northeast legislators on the House Agriculture Committee remains at eight, as Tim Holden (D-PA) lost in a primary this past spring.

Milk Price Update Continued the EU may lead to flat to declining milk production in these regions. Stable-growing global demand would help ease the additional product being placed on the global market. Steady to increasing global and domestic demand will be vital in the upcoming months in order to keep dairy pricing strong as the U.S. will be nearing its seasonal supply surge. Despite their recent challenges, the economies in the US, China and the EU are expected to perform better in 2013 than in 2012. These three areas make up about two-thirds of global economic activity. As their economies improve, overall demand – including dairy demand - should be positively influenced. To the right is a chart for the projected 2013 milk prices. The blue line represents the average projected price anticipated in 2013. However with the uncertainty brought by a variety of factors such as weather, futures volatility and milk production, prices could result in lows as displayed by the yellow line or highs displayed by the green line. Last month in Checkletter, we shared an explanation for the reasons the Producer Price Differential (PPD) moves around so dramatically. In short, the Market Administrator uses advanced pricing factors to calculate the Class I price, as based on either Class III or IV (whichever is higher at the time of pricing). What we’ve been seeing in the past few months is that the Class III value rose between when Class I was announced and when the Uniform Blend price was calculated. This type of movement contributed to low and negative PPDs in all areas. Starting with December milk, we’ll see a decline in the value of Class III between the Class I price announcement and the blend calculation, which will help to boost the PPD value to a positive in some areas. It is most important to remember that whether the PPD is positive or negative, you are always getting paid the Uniform Blend Price for all milk marketed in the Northeast.

DMS Prepares Holiday Balancing As we all get ready for the holidays and prepare for celebrations and time with family, we are reminded that although many businesses have a few days off, the milk business must operate all 365 days out of the year. The cows need to be milked and the milk needs a home - no matter what day it is. Historically, right before the holidays, Class I sees the highest demand of the year as people prepare for celebrations, followed by a sharp downward swing due to reduced consumer demands. This downward shift in demand is often as much as 25 million pounds per week – just on the Class I market. (continued on page 4)


The Season for Giving The Holidays can be an especially difficult time for those suffering from hunger and living in poverty. On behalf of our members, Dairylea annually gives to Heifer International in lieu of sending out Christmas cards to live out the spirit of the season. Heifer International works with communities around the world by giving the gift of livestock and the appropriate training to improve the nutrition and income of impoverished families. If you are also interested in making a donation, Heifer International offers a variety of livestock to give. You can visit www.heifer.org/catalog for more information. On behalf of all the staff, management and Board, Happy Holidays and Happy New Year!

Reducing Winter Hauling Risks Haulers, as well as farmers, are faced with many added challenges during the winter months. Harsh weather conditions can make it difficult to guarantee timely pickups while still ensuring the safety of our milk truck drivers, farm employees and equipment. By keeping the following practices a part of your daily winter routine, many injuries, broken equipment and delayed pickups can be avoided. • Make sure lanes are plowed wide enough for milk trucks to enter safely. • Clearly mark lanes for drivers to see where lanes end and ditches begin. • Apply salt, or some type of grit, to icy areas to give trucks traction and drivers control. • Keep in mind that drivers try to stay ahead of bad conditions. Pickups may be at different times or by different drivers who are unfamiliar with your farm. • Salt or sand the area where drivers walk as they feed the milk hose into the milk house, as well as where they travel with sampling equipment.

DMS Prepares Holiday Balancing Continued In addition, many customers schedule downtime during the holiday season to give their staff time off. These plant closings require changes in milk placements. Each year, through our partnerships within Dairy Marketing Services (DMS), we proactively prepares for the holidays, drawing up mock schedules to have a plan of what milk delivery may be like in an effort to handle member milk as efficiently as possible. After customers have filled their coolers, delivery from DMS is stopped until the holidays are over. With any milk not placed in a demand plant, we rely on our balancing facilities to give our members’ milk a home for the holidays. Such facilities, like St. Alban’s Cooperative Creamery, DFA Middlebury, DFA Reading and LOL Carlisle, will process your milk into condensed, cream, butter and milk powder. This allows DMS to find a home for all milk produced during the holidays and also allows us to continue to pay competitive premiums to our members. If our facilities are filled to capacity, we then look to the Agri-Mark plant in West Springfield, Mass., and Farmers Cheese in New Wilmington, Pa (DFA MEC).

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Dairylea December 2012 Checkletter  

Northeast Dairy Newsletter