As the industry preps for the holiday buying season and looks forward to 2020, some abnormal market conditions—both domestically and internationally—caught our attention.

Ted, T3 and Anna discuss market anomalies that might set the tone for markets in the new year.

Anna: Welcome to "The Milk Check", a podcast from T.C. Jacoby & Co. where we share market insights and analysis with dairy farmers in mind. We're going to talk about dairy markets today but this isn't just another discussion of markets. That's because there are several anomalies we're watching that we think will impact the way markets behave through the end of this year and into 2020. Ted, let's start with you. Milk production in Europe has caught your attention. Why?

Ted: As far as Europe is concerned, production seems to be starting to come up and the question is why. The reason is the Dollar has been so strong and the Euro has been relatively weak. Their production costs have reflected that also. We look at currency valuation as—we have in the past—we've looked at it as what's the cost of putting milk powder into China or the Philippines or wherever. And the Euro is one value, the Dollar is another value and it reflects on the landed price of the product.

Well, if you look at the mailbox price in Europe relative to the mailbox price in the United States, the European prices, you know, 15%, 20% lower than ours depending on the country and so on. So what that means is that our currency valuation is a hell of a lot more...

T3: It's having a negative influence on our ability to export.

Ted: Well, it reflects on the producers' costs in a way that we really haven't acknowledged up to now. Their cost of production has got to be a lot lower than ours in order for them to be increasing production at the price level that they have. Their production's going up, not down and these are basically smaller dairymen than ours, less efficient than ours. And their production is starting to bottom out and go up.

What I'm conjecturing on this is that...or concluding on this is that the value of the currency affects their production costs in ways that we haven't really come to grips with. You know, we tend to think in terms of landed price of product somewhere in the world but it also affects their production cost. If their production costs were quid pro quo with ours, they wouldn't be increasing production. Europe is a lot bigger than we are and if we're gonna be competing for markets particularly in the trade discussions, with the trade discussions going on and so on we're gonna be competing for markets. In this kind of environment we're gonna have a tough time doing it.

T3: I think we were...I think last year feed quality was very poor and I think this year feed quality is better. So when you're talking about a 1% change in milk production levels, feed quality is enough to change that dial about 1%. I think the more relevant question may be, "is it sustainable?" And I haven't heard anyone that strongly believes European milk production is going to be growing at that, you know, 2%, 3%, 4% rate that it has in the various years, in the last five years because as you say, I don't think the numbers are there.

Ted: Well, maybe not. But, you know, we also have to factor in our feed quality which right now is on the edge. This is one of the anomalies. We have not had a good growing season. If we're looking at our frost here in the northern...in the upper Midwest in the next week or two, it's gonna greatly affect the feed quality for the next year.

Anna: Dairy markets move on an international scale. Buyers and sellers thrive when they think globally. Put T.C. Jacoby and Co.'s 70 years of market expertise to work for your organization. If you're looking for someone to help you market your products or you're lo...

What would happen if Federal Milk Marketing Orders' minimum price provisions were eliminated? Would it increase returns to dairy farmers? And even if it did, would it wreak too much havoc in the industry to be worth trying?

Ted, T3 and Anna dive into what might be The Milk Check's most controversial conversation yet.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. The topic of Federal Order Reform is never far from our minds. Whether it's a conversation on The Milk Check or a chat around the office, we talk about it all the time.

Today, we’re addressing it head-on. And we assume the industry will have strong opinions about this. Email us your thoughts at [email protected], or submit a question to www.jacoby.com/askted.

Do minimum price provisions still make sense? What would happen if we got rid of them? Would conditions on dairy farms change for the better? Or is Federal Order reform of this sort not worth the chaos it would likely cause?

Ted: What's the objective of Federal Order Reform? From the dairy farmer standpoint and from the industry standpoint, from my perspective, the objective is to increase the price to the dairyman. The objective...

T3: We're not talking about what the objective was 90 years ago when it was started.

Ted: Well, be it...

T3: But what it would be to change what we have now into something else.

Ted: Ninety years ago, it was started to monitor the veracity involved in weights and tests in butterfat and protein—well, we didn't even have protein. We had butterfat and skim. And the perception in the '20s and early '30s was that everybody was cheating the dairy farmer on butterfat tests. And so they requested a Federal Order that monitored the tests. Eight or ten years later, it morphed into a price mechanism. And over the years, we've had classified pricing. So now we have basically two regulatory systems. And you have the Capper-Volstead Act, which allows dairymen to band together, similar to a labor union and bargain collectively. And then you have a regulatory system, which allows cooperatives to pay less than the mandated price, or the minimum price under the Federal Order into a pool plant. You have two regulatory issues involved here. You have collective bargaining, and the second issue is the classified pricing system, which prices fluid milk at one price, and yogurt and cottage cheese, and whips and dips at another, ice cream. And then you have the cheese at one price and you have butter / powder at another price. In order to participate in the classified pricing system, you have to participate in the regulatory system.

T3: But there's not a rule that says you have to.

Ted: You can go unregulated if you want, unless you're a bottling plant. If you distribute milk, quote-unquote, in the marketing area, in the defined marketing area, by law, you are going to be a pool plant. There are certain percentages involved that by law, you have no choice, you're gonna be a pool plant. And anyone who sells milk into that pool plant is gonna be qualified. And it's against the law to sell milk into that pool plant at less than the minimum price under the order.

T3: And the pool plant would basically be a plant that's bottling milk that is sold as fluid milk at a store, gallon of milk, or a quart of milk, or whatever.

Ted: No, that's the distributing plant.

T3: Okay.

Ted: A pool plant can be anything, it can be a silo down at the end of the string of silos, it can be a whole plant, it can be anything that you wanna make it. It depends on how you pipe it and how it's approved by the regulatory system. The distributing plant is a bottling plant that distributes milk in the marketing area.

It's a traditionally slow month for the dairy industry, so Ted and T3 take a whirlwind tour of the state of the industry. Topics include potentially bad crop yields, slowing milk production, the trade situation with China and a dose of market psychology.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market analysis and insights with dairy farmers in mind. It's early August and things are slow in the dairy industry. We're taking a step back to look at markets as they stand today and discuss where things might go from here.

We'll start by discussing feed. You don't need to be a feed expert to know it's been a hard year. T3, what's your understanding of the feed situation? And how might this year's issues affect milk production?

T3: You know, my understanding of the issues with feed are, you know, we've had a lot of rain, the corn that's in the ground is, for the most part, running behind and in some cases, we'll probably never catch up, they're just gonna run out of time.

Ted: It's running behind, the question is where it's running behind.

T3: Absolutely. You know, where we live in, in St. Louis and in the parts of Missouri and Illinois down by us is actually in pretty good shape. We're hearing that there are parts of Illinois that are not in as good as shape but the fields that I've seen are in good shape around here.

A couple of weeks ago though, I was up in Wisconsin, eastern side of Wisconsin between Madison and the lake and I saw a lot of really bad fields that were just in bad shape for, you know, for the second to last week in July, they weren't even up to my waist yet and they certainly weren't anywhere near getting ready to tassel.

Ted: Michigan is the same way. Northern Ohio, same way. Northern Indiana, same way.

T3: And I'm hearing Minnesota is the same way too. I'm hearing that northern Iowa might be struggling a little bit, but southern Iowa was in pretty decent shape. Here's where I'm going with that discussion. You know, a lot of the corn that turns into being feed for dairy cows is actually silage. What I'm actually hearing is the silage is not gonna be a problem, the dairy farmers are gonna have enough silage, and also due to tariffs and other things, brewer's grains and some of the other things that dairy farmers feed their cows, there's also gonna be an ample supply of.

And so, ironically, even though the corn is not looking good, the corn directly is not gonna be the problem, the problem is going to be that the same weather that's caused the corn to be behind has caused the pasture, whether it's hay or alfalfa or whatnot, is a major problem. That whether they're gonna get one or two fewer cuttings this year, and the quality of the cuttings they do get, it's a pretty big problem. And so it's very safe to say that feed quality is going to be an issue but the issues probably gonna be more an issue of feed quality than feed price.

You know, the basis has gone up and so maybe the feed costs a little bit more in various places but the bigger issue for the dairy farmer is gonna be feed quality in most parts of the country.

Ted: Well, that's a price-related factor.

T3: So that eventually will have a negative effect on milk production per cow. And so you've got cow numbers down, you know, I'm not ready to say milk production per cow is gonna be down because it's usually up a little bit every year but heifer numbers are down. We know that a lot of dairy farmers are breeding with Angus and other beef cows rather than Holsteins or Jerseys. The sense I get is that there's more, they're replacing out the Holsteins much more than they're replacing out the Jerseys.

Ultimately, you're gonna have a smaller number of heifers in the pipeline to eventually go into thei...

Recent advances in gene editing technology have made the production of dairy proteins in lab settings viable and potentially scalable. If the techniques can scale cost-effectively, and if consumers buy in, the dairy industry as we know it will change.

Ted, T3 and Anna discuss what's at stake and ask: Should dairy farmers be worried?

Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. We want to discuss something today that we think will cost significant issues for the dairy industry in the coming years. You've probably heard of Burger King's Impossible Whopper, beef made in a lab, not from a cow. Well, it's happening in dairy too. But before we discuss milk without a cow, let's spend a few minutes on markets and pricing. Over the last several months, we've predicted that prices would continue to strengthen. Since we last spoke, persistent wet weather across the country has made it very tough going for farmers getting crops planted.

Ted: Looking at the pricing today, I think we're on a slow trajectory up. I think it's gonna continue for a period of years. I don't see a change even next year and next spring. I think we may have a little bit of cycling. But given the crop situation, and so on, and the forage situation, 2020 looks like a continued strong year. Do I see an explosion? No, but a steady move up. The butter fat situation, probably, is not gonna be as explosive as we thought before, because I noticed an article come through the other day, that the average test is now reaching 3.8, the standard of identity on milk is 3.67.

So, it's almost 1.3% up. Imagine what a big difference that's gonna make for the demand from ice cream, and cream cheese, and butter, and so on, is concerned. So, I suppose we'll see. Do you think we'll break $20 by the end of the year on the Class III price? I doubt it, but I think we could come fairly close. I think $19 is probably doable. That would mean cheese at $1.90 at some point, maybe in September, October.

T3: I'm less bullish cheese in Class III than I am Class IV, because I think the continued lack of growth in the milk supply is going to affect the Class IV market more than the Class III market. I think the cheese plants will get their milk. But there’ll be some Class IV that won't. I'll add this to it, though. What I think is going on with the weather right now, and how wet it is, and how much people are struggling to get corn into the fields and things like that. It's already had its effect, and it will continue to have its effect.

You may not see the effect of it in milk prices, or I should say in milk production, before this year's harvest. So, between now and September, I don't think you'll see much. But that higher feed cost may force some dairy farmers who are on the bubble out of the business. So, it may increase or continue to support, even at higher prices, the exodus of dairy farmers we've been seeing over the past couple of years. And so, I would say that it does have a bullish effect on 2020.

Ted: The slaughter numbers that I've been following for the last couple of months, we were at about 70,000 per week, now it's 58, 59, 57.

T3: A lot of that is seasonal, though.

Ted: It is seasonal. But the bottom hasn’t fallen out of it. Even with the increase in price, we've seen the Class III price and the blend prices go up a couple of bucks, a hundredweight. Big numbers. And still the slaughter numbers are staying up there. It sort of follows along with the predictions that we've been hearing, and that the smaller dairymen are, given the good job market and so on, are going into a different line of work.

Anna: I think the really small guys are, but we say that small farms are leaving, and I think that that's true,

In a follow-up from our previous episode, Ted, T3 and Anna discuss the state of dairy product marketing.

Plant-based milk alternatives are on the rise. Fluid milk sales have been in decline for decades. Is dairy falling behind? Does the way the industry markets its products need a makeover? And if it does, what would it look like?

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In our last episode, we talked about changing consumer expectations and how those have impacted the dairy industry. But that discussion is incomplete without also talking about the ways dairy products are marketed.

Before we ended the previous episode, T3 alluded to the difficulty the industry has had in marketing to consumers whose expectations have changed. We'll pick up where we left off.

T3: Where are the greatest growth opportunities for the dairy industry today? Every single one of them is small and I don't mean that in a negative way. It's more specialty cheese, more unique products, more local products. I think that's where the opportunities are for the dairy industry. Smaller farms, smaller plants, smaller demand for products and things like that. That's where all the growth opportunities are.

I think there's a ton of opportunities there, but I think our industry, for a couple of reasons, is really struggling with how to access that market, how to successfully meet the consumers' request there, and I think it's because we're so overwhelmed by, you know, we need to clear more milk. We need to clear a lot more milk. Let's build a big plant and that we're focusing on move the big things to solve this problem we've had about dairy demand and oversupply that we're not focusing on where the true opportunity is which is in the smaller opportunities.

Anna: I would imagine that's harder to do too because with all the government regulation on food safety and everything, that's pretty cost-prohibitive for some of the small plants as well.

T3: Yes.

Ted: And if you look at the fact, switching to the demographics, you know, the population is not growing that fast anymore and our consumption has flattened out a little bit. Certainly, we're negative in Class I milk, which is probably a marketing issue more than anything else, but we're negative in Class I milk, but we're still growing in cheese, specialty cheeses and fractionated products and pizza cheese and so on. Yogurt has flattened out. So, the question, then, is building a 10-million-pound plant to produce a small piece of cheese where the industry needs to go? And my answer would be no.

We need to adopt a different strategy, a strategy where you set up an environment where small producers who produce a highly specialized product can take advantage of the infrastructure that a group might develop, and I think that's where we're probably going to go because we certainly have a limited ability to continue to build 10-million-pound plants that produce one product and chew up that much milk in one product. It isn't going to work. You're going to hit the wall eventually with that approach and that, to some extent, might be where a little bit where we are right now.

If we look at the cheese market and the way that cheese market is developed and so on, we're continuing to crank out barrels and blocks and mozz. Unless the population is going to continue to grow, our market isn't going to grow to accommodate all the production that these plants can throw out. So, the increase then comes from the smaller specialized, which is more difficult and certainly marketing is more of an issue.

T3: And the cost per pound is much higher.

Ted: It's higher, but on the other hand, you look at the variations of parmesan now that...

Changing consumer expectations pose one of the most dynamic challenges facing today's dairy industry. More and more, consumers seek organic products from smaller farms in pursuit of healthier food.

The irony? Newer, larger dairy farms and processing plants are more efficient and are better equipped to deliver "cleaner" products. So what do consumers really want? And how can dairy meet their needs? Ted, T3 and Anna discuss.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind. In this episode, we want to discuss whether the dairy industry has some catching up to do in terms of addressing consumers' attitudes about nutrition. We'll get to that in a few minutes. But first, let's discuss the recent spike in cheese prices over the last few weeks. T3, you've said that you think the rally is "hollow." What do you mean by that?

T3: Cheese inventories are still very high. There have been a couple of pieces of data who have indicated that maybe demand has picked up a little bit but when you're sitting on a large amount of inventory, it takes a long time to really change the supply and demand balance. Just because a couple of data points say, "Hey, things might be getting better," doesn't mean you've solved the problem. It just means that maybe if you stay on this course for another six to 12 months, you might get to a point where you've solved the problem. And everybody's reacting to it by saying, "Hallelujah, the cheese price can go up," and I can tell you as a someone who has to go sell cheese every day, in the last three weeks as we've gone from $1.45 cheese to $1.73, more and more buyers have backed off and said, "I don't need this cheese today. I don't need this cheese anymore. I've got more than enough in inventory."

I was just in Chicago in an industry meeting and the comment I heard from multiple converters of cheese was, "I'm pretty happy with where my inventory is right now." Because they saw the cheese market go from $1.45 to $1.73 and they're like, "Sweet, my inventory value just went way up." So, now what are they gonna do? They're gonna stop buying, they're gonna run their inventories down into the market. And so, we could easily go the other way. That's why it's hollow.

Ted: And I tend to agree with that. Although I do think that most of the cheese inventories are hedged so they really carry the inventory is of nominal concern to them. And that's a change that's occurred over the last few years that will change how quickly this can change. It used to be, all of a sudden you get to a point that like somebody has flipped the light switch and, boom, it would take off one way or the other. It seems like the cycle has flatted out and lengthened because of the risk management, because of the storage ability, because of the flattening of demand and also, it's probably flattened on the dairy side too, on the supply side. People are breeding for beef right now and not for milk.

T3: But that'll be—we won't feel the effects of that for another two years.

Ted: Well, that's my point. It's gonna be what? Once it turns around… I don't think it'll turn around this summer and go the other way. It may not go as fast as a lot of people like to see but it'll continue for a long time.

T3: It could.

Ted: That's what I'm sort of thinking it'll turn out to be, which will be a change from what we had before.

Anna: Let's move on. We talk about changing consumer expectations all the time. It comes up in pretty much every episode we do. Obviously, the food we buy and the reasons why we buy it always evolve over time. But right now, the dairy industry seems to be struggling with how to get people what they want. T3, start us off. In your opinion, what's going on?

In this special episode, Ted and T3 enlist the help of Richard Bradfield, General Manager of St. Louis-based International Ingredients Corporation, to discuss the impacts of the African swine fever virus on dairy ingredient export sales to China. Jeff Johnson, T.C. Jacoby & Co.'s Vice President of Dairy Ingredients, also sits in.

Nearly half of the hogs in the world are raised in China, but the combination of fatalities from the virus and preventative culling has sent herd numbers plunging down as much as 35%. It's drastically reduced demand for whey permeate, a crucial part of hogs' diets.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby & Co., where we share market insights and analysis with dairy farmers in mind.

T3: Welcome to "The Milk Check." Today we have a special guest in Richard Bradfield. Richard runs International Ingredient Corp?

Richard: Am part of the team.

T3: And part of the team for International Ingredient Corp. International Ingredient Corp is the second largest whey permeate manufacturer in the United States, and with everything that we're hearing about with African Swine Flu and what is going on in Asia, we thought it would be a great topic to talk about. And so, we wanted to find somebody who is an expert who can tell us a little bit about what is going on in Asia, what is African swine flu, and how it's affecting our dairy markets and our whey markets. And so, Richard, thank you for joining us today.

Richard: Thank you.

T3: Why don't we start, why don't you tell us a little bit about International Ingredient Corporation and what you do, and why you got...why we would think of you as an expert in whey permeates?

Richard: I have no idea, but... So, thank you very much. So, again, Richard Bradfield with International Ingredient Corporation based here in St. Louis. We are an animal feed ingredient company, so we have 10 facilities throughout the U.S. About half of our business is in the dairy side of things, so it's an important part of our business. We also export—about half of our production is exported, so the export markets and what's going on in China is obviously very important to us. I've been with the company for about 25 years, and I am currently the General Manager of the group there.

T3: About half of your production is exported?

Richard: Yes.

T3: For the whey permeates that you produce, is that about a 50/50 split as well?

Richard: I would say, overall under whey it's about 50% is exported, for the permeates it would be a larger percentage of the production is exported. I would say probably more like two-thirds exported.

T3: And of that two-thirds that's exported, what percentage would you say goes to China or Southeast Asia? Or, just...let's just talk about in terms of the general permeate market in terms of your best guess.

Richard: Of our business?

T3: Mm-hmm.

Richard: Our business, basically, we've always felt strongly that you needed to have…you know, be in certain regions, so we're obviously here domestically. We've focused on, you know, Mexico, Latin America, and also then China, Southeast Asia. Of the three components, I would say Southeast Asia is the largest part of our business, followed by domestically, then followed by the Latin American region.

T3: When did you guys first start hearing about the African swine flu, and I guess, why don't you just tell us a little bit about what is going on right now in China, and what is going on in Southeast Asia, and what is this virus we're hearing about?

Richard: So, it's the African swine fever, because there's also the avian flu to something totally different, and we just recently heard of some cases popping up there as well. So,

So far, milk production across the eastern U.S. is trending downward. Cheese prices are strengthening. The pieces are in place for an industry-wide recovery. Will it happen?

Also, Ted, T3 and Anna answer some questions submitted by a listener.

Anna: Welcome to "The Milk Check," a podcast from TC Jacoby and Company where we share market insights and analysis with dairy farmers in mind. We've seen an increase in the cheese price and the Class III price is looking up for March. Do either of you think that's sustainable, and has that changed your forecast for the end of the year?

T3: It looks like the Class III price in December and January are both gonna be somewhere right around $13.96, $13.95. You're probably gonna have two months in a row where your Class III price is within 10 cents of each other. Last couple of weeks we've seen a bit of a pop in the cheese market. So we've seen the cheese market go from...

Ted: Why did we see the pop?

T3: A couple of factors. One, I think December and January were pretty good months for export orders. Mostly...not necessarily a traditional market like Mexico. More, you know, Asia, the Middle East. I think we saw a pickup in demand for U.S. cheese in those markets because, one, Europe's milk production continues to struggle and the U.S. cheese market in December and January was lower than the world price. I should qualify, the spot market was lower than the world price, but the futures market was actually higher than the world price. So you saw a lot of spot buying that was going into the international markets, but that kind of kept the U.S. cheese market cleaned up a little bit.

And I think what happened is we got into February, that started to become a little bit more apparent to the buy side of the equation domestically. Now there's a warning embedded in this as we've gotten into a price and the $1.50s for blocks and the $1.40s for barrels, we've taken ourselves out of the international market. And so we've lost a nice chunk of demand that we were getting 15 cents ago when we were in the $1.30s.

Ted: But the futures market hasn't really changed that much.

T3: No, it hasn't. And we've had a lot of discussions about that in our office as to why. And I have two beliefs about that. The first is I don't think that our cheese markets are ready for a big rally. I do think they're coming back, in other words, I don't think a $1.58, $1.59 block price is sustainable in the middle of February. I don't think a $1.42, $1.43 barrel price is sustainable in the middle of February. And so I suspect that sometime in the next three to four weeks, we may be up here for a few weeks, but at some point in the next three to four weeks, I expect those prices will come back down.

However, I'm also gonna say it this way, bull markets aren’t straight linear lines that go from a low price to a high price. They evolve over time and they evolve within volatility. And usually the way it works is you start out with a really low price, you go to a higher price, then you'll pull back to another low price. But that low price is a higher low and then you ended up with a higher high and then a higher low. And so the market's still cycling from high prices to low prices, but every low price is a little bit higher than the last low price and every high price is a little bit higher than the last high price.

And so the way I expect that this cheese market's probably gonna play out over the next, let's call it 12 to 24 months, is we're still going to see volatility. You know, maybe we peak this cycle around $1.59 in blocks and maybe $1.42 in barrels. And then we pull back maybe to $1.45 in blocks and $1.32 in barrels, which is...maybe even $1.25 in barrels. That's still higher than the low a month ago. And then the next cycle through,

In this episode of The Milk Check, Ted, T3 and Anna tackle a persistent question in the dairy industry: Would it be feasible to set a minimum milk price for producers?

We want to know what you think, too: Can a minimum milk price work? Why or why not? Email us at [email protected].

Anna: Welcome to The Milk Check, a podcast from T.C Jacoby & Co. where we share market insights and analysis with dairy farmers in mind.

Today is January 25 and we'll start with Ted's impressions coming out of Dairy Forum. Then, as we hoped, we'll dive into the discussion about minimum pricing that we've been planning to have. Before we get started on the minimum pricing discussion we want to say that we know that some of what you'll hear may be unpopular. We're not trying to tear down any of the ideas we discuss but rather further the dialogue.

T3: So we just got back from the Dairy Forum. And usually, the Dairy Forum is a gathering where it's put on by the IDFA, the International Dairy Foods Association which is more processor-based than farmer co-op based though admittedly there's a lot of co-ops and a lot of farmers that attended, most or all the processors are there. Sometimes there's a lot of exciting things to talk about in the marketplace and sometimes the market has already digested, you know, what's gonna happen next by the time you arrive. I would put this year's Dairy Forum in the latter category. There were no surprises coming out of the Dairy Forum.

Ted: Well, the Dairy Forum was not that big of an event this year.

T3: Not this year. But it was nice to be in Florida with 60, 70-degree weather when it was -8 in northern Wisconsin.

Ted: All right, shall we move into the issue of minimum prices? Guaranteed minimum prices?

T3: Why don't you lead us off, Anna, with the questions.

Anna: Well, there's two of them. Two proposals that we're sitting looking at right now. And the first is just a call for a minimum price that sustains a farm. And the second is for minimum prices, but set in a tier system so that you have, you know, some baseline set. And I think most people who have thrown this out there have set a pretty low volume to that baseline, it's basically to support a family farm. And then anything above that production gets paid a discounted rate, basically by the co-ops. You would have a set price for that first tier of volume, and then you would have whatever's left gets divided out among all the remaining volume and paid out.

T3: You want to attack it first?

Ted: I think I can attack it as well as any. So repealing the laws of supply and demand are probably not gonna work.

T3: Why?

Ted: I believe that we have had a cultural aspect to the dairy industry for 100 years that generations were raised with the dairy industry and we can remember when 200 cows was a large dairy. Bear in mind that a truckload is about 350 cows to produce roughly a load of milk every other day. So we had back in the 50s and 60s, you know, you would have six or eight producers on a truck of milk. And those producers basically probably were second or third generation. And they would take their milk check and often go to the grocery store and spend it and they didn't really have an aspect as to whether they were doing poorly or great, it depended on how much money they had left when they bought tractors and when they bought groceries, and so on.

And so, that was a cultural way of life. And it continues even to some extent today, but it's diminished. And the people who are proposing these two-tiered systems and minimum prices basically are, I hate to use this word but basically the remnants of that. And of course, our heart goes out to them. But the reality of it is that their cost of production in that environment are much...

Milk production is down in the eastern half of the U.S., tightening markets nationwide as surplus milk is pulled eastward from western dairies. Ted, T3 and Anna discuss what it could mean for stressed dairy farmers.

Also, we observe a surging nonfat market that is sending Class IV milk prices upward. How high will Class IV get? And what will that mean for Class I prices?

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and Company, where we share market insights and analysis with dairy farmers in mind. Today is January 10and we want to talk about where the milk has gone as we've noticed a decline in production and a shift in distribution, particularly in the Northeast. So let's jump in right there.

Ted: Yeah. Well, where is all the milk? The milk is alive and kicking because we're not seeing any great reduction in the cows. We're listing dairymen who are we're going out of business in every publication you read. Large and small are going out of business. Small more than large but still are giving it up, but the cows aren't disappearing. They're going to the neighbors for the most part. There is a slight increase in slaughter. I'll give the point, okay. But basically most dairymen are using up the silage they've got by keeping the additional cows.

T3: That is going on. And the reason it's going on is because the cattle market is crap. You can't get anything for your cows right now. It's about as low as it's been in probably two decades.

Ted: That's right. So when it comes time to talk about what the prices are going to be, you know, it's going to involve a lot of ex-cows. Until we see less cows, you know, it's not going to be changed much.

T3: Adding from a milk production standpoint, you're right. Well, I think it's clear that one of the big problems right now that dairy farmers who want to exit the business have is the cattle market is so bad that there's no value for your cows. And as a result, it's actually forcing farmers who want to go out of the business to stay in the business or it's forcing banks who want to foreclose to not foreclose because there's no value there, if they do it. But one thing that is going on is you're getting an increasing percentage of farmers who are breeding their Holstein cows with Angus cows and literally breeding for beef cows.

You may be struggling to sell cows out of the business, milking cows out of the business. But there's an active reduction in the heifer pipeline going on. Now, we're three years away from that affecting this market. But maybe there's some long-term hope there that because of this market is so bad, they don't even want to invest in future Holstein cows. They're literally breeding the Holstein cows with Angus cows for beef and not making dairy cows.

Ted: I wonder if there isn't sex semen to go for male instead of female. Interesting question. But you have to ask somebody who knows.

T3: I would agree. I wouldn't even try to answer that. But I do think that one of the reasons that this trend has started is because of sex semen. I mean, once you got to the point where, you know, 65%, 70% of all the calves are female, it was inevitable that you had a problem with too many cows coming into the marketplace and you really have to do something, too many heifers. You're going to have to do something about it by breeding for beef cows that counteracts that problem.

Ted: It'll be down the road where we could see a real spike, if we run out of heifers. I think it's just, what, two years to bring heifer into the...

T3: About 24 months.

Ted: Yeah, and right now you're looking at 2021 before you're going to look at any efforts coming in. 2022, really. So we could be looking at some big numbers between now and then sometime, if we run short of cows. However,