The Milk Check

We're no strangers to criticizing the Federal Order system. We find a way to do it almost every episode.

But this month, we're devoting the entire conversation to the fact that the regulatory framework in the dairy industry has hurt producers' bottom lines more than helped.

It's a phenomenon we've noted in bits and pieces in previous episodes, including near the end of our conversation last month. But in this episode, we examine the lack of competition and innovation in the industry with an eye toward its earliest source—the Capper-Volstead Act of 1922.

Ted shares an idea for how to fix the problem. It might seem backward—but only at first.

T3: What do we want to talk about?

Ted: Well, one thing as Anna can testify we've gotten some emails from mostly dairy farmers who express a lot of paranoia with regard to the federal order system and the regulatory system and where the money is going and so on. I think we had part of that discussion last time, didn't we? Didn't we shelf part of it?

Anna: I know we started that conversation.

Ted: Yeah. We beat it a lot. And we've also danced around it a lot. The tenor of the emails that we got was paranoid. You know, somebody's going south with the money, the co-ops are no good, they're stealing the cash, and that isn't what's happening and that's not the problem.

Anna: You know, even some of our producers have had a little bit of paranoia, and not about the co-ops or us, but about the Federal Order system in general. Because when everybody has money taken out of their check, they don't understand that somebody is getting it. It looks like, you know, the MA office is keeping it or something, when really it's not that. It's that it gets distributed to the co-ops and everything, especially the ones who are using, you know, lower price utilization.

Ted: You know, if we want to go back to square one and the Capper-Volstead Act, and then regulation that developed not at the same time but eight or ten years later, the Capper-Volstead Act gave the co-ops power to collective bargaining similar to a labor union. Well, let's take a look at the results of that. In the '30s, when the Capper-Volstead Act came in, we had basically fluid dairies, bottling plants, were 70% or 80% of the market in cheese, and it was a balancing item similar to what powder is today.

It was not a good retail product in the '30s. And the collective bargaining was mostly targeted towards the fluid end of the industry. Look at the results. The fluid end of the industry has been destroyed. So, how do we solve that problem? The problem is not necessarily the fault of cooperatives. The problem basically goes back to the structure and the fact that we've eliminated competition for the milk. Now, that, of course, that gets back to, well, what's competition? Is it collective bargaining or is it handlers bidding for the supply?

So that's a discussion, I think, that probably needs to be had but it needs to be had in the vein of not being anti-cooperative because that's not the right way to do it. There's some very good cooperatives in the United States and in the world actually. But generally speaking, they don't do a good job on the marketing side of the business. And that's where 50% of the price on the retail shelf is. It's in marketing. The dairyman winds up lucky, 20%, 25% of the retail price. So, obviously, to my mind, there's something wrong. And I think it comes back to the fact that you don't have the competition for the milk, and that's a regulatory issue. I'm not sure how you solve it. Clipping the wings of the cooperative a little bit.

You'd only need one look at recent history on the CME to see the rollercoaster that has been spot cheddar prices.

In this episode, T3 notes the collision of around a half-dozen contributing factors to explain why it's happening. Ted discusses why the Federal Order system is hurting the situation more than it's helping.

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

Ted: What should we talk about? Markets have gone from the penthouse to the outhouse.

T3: Well, I would say the markets went from a fair price to the outhouse to the penthouse back to the outhouse, and I actually think we're gonna probably end up back in the penthouse in about a month. It's a roller coaster.

Ted: And it's chaos on the milk side. I visited with our milk group today a little bit and depending on what you're making and what you're selling and what your orders are, you've got the Class III for August right now at $19-something, and I think probably around $19.50 or so. And you've got the Class III for September probably around $17 maybe?

T3: Yeah $16.80 or so right now, $17.

Ted: Something like that. So they could have as much as a $3 per hundredweight gap. So here we are trying to sell milk for delivery at this point in time and people are trying to figure out what price they're gonna wind up having to absorb to put the milk into cheese and then what they're gonna be able to sell the cheese for. So the futures market, at least in my view, is rather inadequate to solve that particular problem. And I think that accounts for a lot of the issues right now because, Teddy, and you correct me, you're in cheese, but the inventories are not burdensome and the sales haven't been that bad. In some cases, depending on the style and so on, they've been pretty darn good. And yet the milk, we wind up with some people unwilling to pay the going rate for milk because of the violence in the market at this point in time.

T3: Exactly. And I think the biggest problem that we have right now in the marketplace isn't necessarily the price as much as it is the volatility of the price. Why don't I start by explaining, kind of, what's causing this volatility? What has the journey been since, let's say, the end of March and what it's doing farther down the food distribution channel and how people at the supermarket level and at the restaurant level are reacting to it, and then we can talk about how that feeds all the way back to the milk price and what's causing this rollercoaster that is creating stress for everybody in the pipeline?

When the pandemic started and restaurants started closing and food distributors started canceling cheese orders, the price started to drop. And by the end of March, the price had almost gone all the way down to $1 a pound. But two things happened while we were that low. The first thing that happened was supermarkets started seeing huge increases in sales. And the first part to keep your head around is cheddar, which is how we price all of our cheese and ultimately our milk, is really a market that's skewed to retail. We sell more cheddar marginally in retail and more mozzarella, for example, in food service. And all you have to do is think about it when you're in a supermarket and you look at all the shredded cheeses on all the pegs in the dairy case, you'll see a lot more cheddar packages than you will mozzarella packages. Whereas if you're thinking about it from a foodservice perspective and you think about all the pizzas and lasagna and Italian food and everything you eat, they actually sell a lot more mozzarella in that direction.

The last few weeks have been some of the strangest for an industry in the midst of its weirdest year in memory.

Listen as Ted, T3 and Anna get to the bottom of why spot cheddar prices maintain a steady hold on improbably high prices and why the Federal Order system appears to be doing the opposite of what it was meant for.

T3: So here's where we're at. It's July 8. Today, cheddar blocks on the CME spot market are trading at $2.7375 a pound, barrels are trading at $2.40 a pound, nonfat is trading at a dollar three and a quarter, butter is trading at $1.68 and three quarters. You have over a $10 difference between where July, Class III milk will probably come in and where July, Class IV milk will probably come in, which is really about as big a disparity as I've ever seen in my 25 years of trading cheese and powder in the United States. It's amazing. Talking a little bit about the markets and what we expect going forward, starting with cheese, there has been for the month of June a genuine tightness in cheese specifically in cheddar blocks and cheddar barrels. We talked about this in the last podcast, you have a unique situation where retail sales continue to be much stronger than normal because of the pandemic. At the same time, the anticipation of the world opening back up, restaurants opening back up was causing food service distributors to order in large quantities to refill their pipelines, and you had the USDA's purchasing program and Food Box Program on top of all of that. And that created kind of a perfect storm of all the usual demand for cheeses across the whole Food Industry, whether it's restaurant-based, whether it's supermarket-based or whether it's government-based were all ordering it levels much higher than they normally do, which caused the shortage on cheddar and drove the market up to, you know, prices at $2.50 or higher.

You know, the question everybody's been asking already for a month is how sustainable are we up here? And the answer that I think I would give everybody is we are not going to be at $2.50 for the rest of the year, but we've been at $2.50 for over a month now and it is not out of the realm of possibility that we stay here for another two to four weeks. Furthermore, if we do drop off these lofty levels, I'm not sure we're dropping, let's say to $1.50 or to $1.75. There is enough underlying demand, that that probably that first place where you drop to is still probably above $2 a pound. And the reason I say that is all of the converters out there, those who buy the cheese and shredded or chunk it or slice it and put it into the packages for retail or restaurant demand, they're telling us that their inventories of cheddar block and cheddar barrel, if you're a processed cheese manufacturer, are on the low end of where they like them to be at this time of the year. Keep in mind that usually right around the end of June beginning of July is when cheese inventories peak. And then as we get through the second half of the year and demand picks up for the holidays, and milk production decreases because of the heat of the summer, you start seeing cheese inventories dropped back down. Well, at least by the tone that I'm hearing from a lot of our customers, you're actually at a place where people are very uncomfortable with how much cheese they have in inventory. And they're inclined to say "We don't have enough and we're concerned about having enough cheese for the remainder of the year."

Now, the flip side of that is they will also say in the same conversation, "We have absolutely no idea what to expect when it comes to demand." We would expect that it's possible the food service distributors have over-ordered in terms of the restaurants opening back up, because everything we're hearing about restaurants is they're running it,

Volatility continues to permeate the dairy industry as the world economy contemplates a return to "normal."

CME spot cheddar is the most pronounced example, having rocketed up to $2.40 at the time this recording.

Why? T3 explains how it's a symptom of an environment where the entire industry is guessing.

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.

Ted: Maybe we ought to start the discussion by someone telling us why the cheese market is doing what it's doing.

T3: Okay.

Anna: Good luck.

T3: I'm assuming you mean me.

Ted: Yeah.

T3: So, how about we use the analogy of we're on a roller coaster and we just went down the big hill and now we're going up the big hill.

Ted: It's gotten much higher than I thought it would ever go. I thought the thing would be ready to crash at $1.90.

T3: Yeah. I think everybody's kind of in the same boat. To me, it's a combination of factors all hitting at the same time. You still have retail sales running at 20% to 30% above normal, you now have foodservice distributors refilling the pipeline that emptied out when COVID-19 started. Well, now, restaurants are starting to open back up and they're trying to refill the pipeline in preparation for everything going back to normal. And I just talked to one of the big cheese mozzarella manufacturers here late last week who told me his foodservice orders are running at 120% of what they normally would this time of the year. In addition to that, you have the food box program, the USDA Food Box Program, which is quickly becoming a debacle because a number of the winners of the program did not properly calculate or hedge the cheese and butter portion of their purchases to put the program together to deliver to, you know, the charities. So, when they bid that price, they bid it at a fixed price. Now, there was an interview with one of the larger regional foodservice distributors about a week ago, I'm going to paraphrase here.

But basically, what this owner said was that they bid on the Food Box Program and they were told their bid was too high. And what he said was he goes, he believed the winners of many of the bids did not have their head around what the true costs were to put the whole program together. And that they may have been underestimating what the cost of some of the products were, specifically cheese and butter on the dairy side of things. And his comment was U.S. Foodservice, Sysco, Performance Food Group, all bid on the program and all were told their bids were too high because there's no way that some of the winners of this program could possibly put together some of these boxes at some of the costs that they bid if they won the program and these guys didn't. So, that has to be very concerning. And that was before the cheese price raised to what is now $2.40. But you add that demand on top of foodservice distribution demand running at a 120% of normal because they're refilling the pipeline on top of retail demand, that's still running at about 120% of normal. And that's the recipe for cheese market that is raised from $1.01 to $2.40 in the span of a little more than three weeks and is likely to keep going higher before it comes back down.

One of the things that I think also plays into this is the fact that production planning, distribution planning, you know, all of these big companies, whether you're a foodservice distributor or a restaurant group, restaurant chains, or cheese manufacturers, they all have planning departments. So,

Help is on the way for dairy farmers who were forced to dump milk as COVID-19 continues to jostle the industry.

But does the USDA's proposed assistance go far enough? And, is Washington relying on outdated methods to solve a uniquely 21st century problem?

Ted, T3 and Anna discuss the proposal and offer predictions on the timetable for a return to "normal." Ted's dogs Henry and Ralphie offer their analysis.

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

T3: So last week the USDA finally announced their plans to help the dairy industry and they came out with a package to help dairy farmers and then they also came out with a package to, what they called the food box package that included some food service distributors to get money to food banks and also some bid programs to buy some cheese and butter and other dairy products. The program to help dairy farmers I think I'd start by saying was probably underwhelming for most people in the industry. It probably helped smaller producers more than larger producers because it capped the compensation at $125,000 for the one program, and if it included some of the help they put on grains and others, I think it was capped at $250,000. For large farmers, that is really a drop in the bucket, and some of the numbers I've heard out there probably doesn't help some of those larger farmers by more than, 15, 16, 17 cents a hundredweight. Now for the smaller producers, that can potentially be very valuable. And if they're covering 85% of the losses and 85% of the drop in price from where they were in January to where they were by the middle of April, it probably is gonna end up being very helpful. But for the industry as a whole, these days over 70%, 75% of the milk comes from larger producers. And so you ended up with a program that probably did not help the majority of producers, at least from a milk perspective in the industry.

The other thing it did not include, it didn't include anything that would incentivize reducing the milk supply because it was a direct payment program. And so the USDA will pay farmers directly, which means that it can't be used to incentivize producing less milk so that we can avoid dumping milk. But that also is, the third issue is there was nothing in the announcement at all to help with paying for the milk that was dumped, because so many processors had lost enough food service sales that they simply were not in a position to take milk and so they had to push back on their contracts and simply not take the milk. And in many cases, there were force majeure declarations, or in some cases, they didn't even take it that far. They just said, "We can't take it." And the Co-ops had no choice but to dump the milk because they had nowhere else to go with it. So that USDA program I would say has been underwhelming. And I don't know, Dad, do you have any other thoughts as to what you're hearing about how farmers are reacting to the program?

Ted: Well, I haven't really heard how they're reacting. I don't think we're far enough into it. At this point all these programs are simply discussion. Nothing at this point has been written in stone. The problem would be with regard to the $125,000 you're right, it is a drop in the bucket and it addresses 20% or 25% of the milk supply and leaves the other 70% or so out, so they don't participate in that program at all. It strikes me, and then they're talking about purchasing programs and then the Secretary actually vocalized an aversion to any remuneration for dumped milk with the theory that ,"Oh no, we're not gonna do that. We're gonna buy products and we're gonna distribute it to the poor.

As the COVID-19 crisis wears on, its effects on the dairy industry have become more acute.

Will producers be forced to dump milk for a lack of buyers? Should the government step in to prop them up? And even if it did, would that be enough to prevent farmers from going out of business?

Ted, T3 and Anna foresee a tough few weeks ahead.

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: The last time we had the podcast...we did a podcast which was about two and a half weeks ago, there was a general feeling at the time that cheese and specifically cheddar might hold up okay in this because retail sales were good. What was really interesting what happened, you had the initial push into the supermarkets and everybody went into the supermarkets to buy and they bought up the whole store, you know, so that they could go home and stay at home for an extended period of time. And that drove retail sales way up and everybody expected those sales to come back down as we got into the middle of this crisis. Today is April 2. So this was about a week ago today, I would say a little over a week ago, Wednesday of last week. The best analogy that I've been able to come up with is around the interstate. You're driving at full speed, you know, little over the speed limit like we always do. And you will arrive in traffic, and you go from driving 60 miles an hour, you know, to almost a dead stop as fast as you can, because everything's backed up. And the reality is, it's traffic, you're gonna start moving again but once you're in traffic you're gonna be moving at 30 miles an hour.

And that was almost exactly what we felt with this market in the middle of last week, everything was running at full speed. The restaurant chains and that distribution pipeline was really pulling hard and eager for every piece of cheese, especially cheddar that they could get their hands on. And then they just got to the point where they were caught up. And so there are all of those extra orders, which were extra orders so that you could take the displaced foodservice demand and put it into retail, all of a sudden those extra orders really slowed down. And the whole market just backed up and it's backed up almost immediately. And so it was within a 24- to 48-hour period you went from you know, moving a lot of cheese all over the place to try and reallocate the cheese towards retail sales to, "Okay, now where do we go with this cheese because nobody's buying?" It happened very quickly and all of a sudden the market really had no choice but to come down and that's why you suddenly saw this cheese market, you know, drop over the matter of three or four trading days from you know, something almost at $1.80 down to something at $1.30.

Now, what will happen from here, I think it's harder to predict. I think the reality is hit that even cheddar which is I think the cheese that's gonna hold up best in this environment, the sales into retail are probably not gonna be enough to overcome the loss of sales on the food service side, especially when you consider that there's a lot of milk being moved away from non-cheddar plants into cheddar plants. So every cheddar plant in the country is running full. Where do we go from here? You know, one of the great reality of a market economy is uncertainty really tends to get people to stop buying not just at the consumer level, but also at the business level. And nobody was gonna buy any extra cheese at $1.70, now that we're at $1.30, my belief is we're in a place where companies are gonna say, "This crisis is temporary, eventually we'll come out of it. And I'm willing to build inventory here.

As the global COVID-19 outbreak continues to disrupt life as we know it, the dairy industry knows only one thing for sure: There's a lot left to learn about the impact the pandemic will have on global markets.

Ted, T3 and Anna phone in for a discussion on dairy markets buffeted by confusion.

But as Ted reminds us, uncertainty is no stranger to dairy. He says the industry is equipped to handle what's thrown at it.

Anna: Welcome to the ''Milk Check,'' a podcast from TC Jacoby & Company where we share market insights and analysis with dairy farmers in mind.

Ted: Leading into this by now I think everybody's interested in knowing what effect the coronavirus will have on the dairy industry. And of course, at this point in time, the effect is mostly confusion in that consumers are going into the grocery stores and cleaning out the milk section, buying long-life products including cheese and shying away from going into restaurants and food service establishments. And so we have a migration of milk away from cheese plants serving food service and special kinds of group facilities, restaurants and so on, hotels, towards retail, cut wrap and retail-type packages. In addition to that, we have a shortage of milk at the bottling plant because people are going in and cleaning out the dairy case similar to what they traditionally do just before a hurricane hits down in Florida.

The normal effect of this is to have this surge in production and change, and then a week to ten days later, everybody has a lot of inventory in their refrigerator and sales start to back up and surplus begins to exist. Whether that's gonna happen this time or not remains to be seen. It could not in that everybody seems to be heading for their home and then planning on staying there for a while. And I think most people are expecting to be there at least a month. So that's gonna mean that they're gonna keep an inventory of milk, long shelf life products and so on, and they're gonna be eating those kinds of products at home as opposed to going out to restaurants.

School lunch business is another issue. I understand that in some areas, the school milk is being delivered by school buses. I'm not quite sure how that works. But most of the milk being consumed now will be consumed at the kitchen table. So that also bodes well for retail milk sales. Does not bode well for people who are looking at school lunch business, school milk. So there is confusion, and how long it will play out remains to be seen. It could go on for a week or two and it could go on for a month or two, maybe longer. So we'll have to see.

The dairy industry in general can handle whatever is thrown at them. Production was just announced for last month and it's up some big numbers, roughly one and a half percent depending on who you're reading. One source says 2%. That's a very bearish number with regard to milk and milk pricing under the longer term and would indicate that milk pricing, a Class III price somewhere in the $17.00, $17.50 range, pretty attractive to dairyman for them being increased production that much. Our general view of it is that anything over 1% is bearish as far as milk is concerned. And I think the markets right now in addition to the negative effects of the corona issue, I think production is also weighing heavily on the markets. Even though the cheese market went down a little bit today, the futures market went up because I believe basically that the pressure down is overdone and so it's rebounding somewhat. Ted, would you wanna weigh in on the cheese market?

T3: Sure. Obviously what's happening in cheese, just like all the rest of the, not just dairy, but the food industry,

It's less than a year and a half old, but the USDA's new Dairy Revenue Protection program has already led farmers across the U.S. to hedge an estimated 12% of the national milk supply.

Blimling and Associates' Phil Plourd, Tiffany LaMendola and Katie Burgess join Ted and T3 to explain how this price risk management tool works and discuss why quick adoption of the program bodes well for the industry.

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

T3: Hello everybody, this month on The Milk Check we have another guest on our panel, Phil Plourd is President of Blimling and Associates. And he and his team are here to help us learn about DRP or the Dairy Revenue Protection program recently created by the USDA to help dairy farmers protect downside milk price risk. Well, we're excited today to be here with Phil Plourd, Phil's got two other members of your team that have joined us.

Phil: Yes. So we have on the line today Tiffany LaMendola, who's the Vice President of our risk management practice and she is based in the Modesto, California area. And also Katie Burgess, who is one of our Risk Management Leads. And the two of them have spent a lot of time over the past year working on the DRP insurance program. So been out in the field, working with dairy farmers and getting them enrolled and getting them going in the program.

T3: So what I thought today would be a great topic to discuss with Phil in town was the dairy revenue protection program, which is a great program that's been set up for dairy farmers, but a program also that I have to admit I don't know a lot about.

Ted: And I have to concede, I don't know anything about it either.

T3: So I thought we'd go ahead and have Tiffany, and Katie, and Phil, kind of give us their view of what the program is all about, how it works. And Dad, you and I can just ask questions, and it's gonna be an educational experience for us as well as for the farmers that listen.

Ted: It can't help but be educational for me.

T3: Phil, Katie, Tiffany, what is it?

Tiffany: It's a relatively new program for dairy producers to manage milk price risk. It was first rolled out in October of 2018. There was a slight delay while the government was shut down. And so it really is quite new. So don't feel bad if you don't know much about it. We're finding actually a lot of producers are still learning about it themselves. At its simplest terms, it is the ability to buy a milk price floor at subsidized levels, it's very customizable by... So, you know, obviously different producers in different regions have different milk price risk, you know, based on how their milk prices are determined. And this allows a producer to go in and sort of do their best to mimic how their milk is determined with some combination of Class III and Class IV. And look out into the future and set milk price floors kind of based on where the markets are at, at a quarter-by-quarter. And really kind of dial in as close as we can to, again, how their milk price is determined. It is offered through the Risk Management Agency of USDA as a crop insurance program. So you do have to buy essentially the program through a crop insurance agent, so producers kind of across the U.S. will be working with crop insurance agents to access this program.

Ted: So where are these agents located, in the local extension service?

Tiffany: They're kind of all over. So we have agents on our team. You know, we'd like to think we have the dairy expertise piece of it that's been quite important.

In this episode, Ted and T3 are joined by Eric Meyer, President of HighGround Dairy in Chicago. Eric explains the CME's new block cheddar futures contracts, which will begin trading on Jan. 13.

The panel also reacts to surprising NDPSR data for the month of November. Eric is reminded that the St. Louis Blues won the 2019 Stanley Cup.

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

T3: Welcome everybody to the T.C. Jacoby & Company Milk Check podcast. Today, we have a guest speaker: Eric Meyer, President of HighGround Dairy. And we thought we'd talk about the milk production report and a little bit about markets, and then also talk about the new cheddar block futures contracts that are going to be introduced on the CME in the middle of January. Eric, welcome.

Eric: Thank you very much. It's great to be here in a cold and snowy St. Louis. It's almost colder here and snowier than up in Chicago, so I feel for you.

Ted: How about the St. Louis Blues who played Chicago on Monday night?

Eric: Oh, do we need to talk about that? I was also told, I think, four or five times since arriving last night that you guys are currently the Stanley Cup champions. That's always nice to hear after three of them in the previous five years.

T3: I'm glad you know that. It's Wednesday, December 18. It just so happens the milk production report was released not ten minutes ago, before we started this, recording this podcast. Milk production in November came in at up 0.9% in November for the country and up 0.5% in the 24-state. And that's a bit of a surprise to the downside. I think most people were expecting something up about 1.5%. Eric, what are your thoughts on that?

Eric: So we were in that same camp, so we thought that the all U.S. number was gonna be in the 1.2 range with the 24 states that have been trending a lot higher. And we'll talk about that. I think there's a big shift in the last year of the 24 states straying from the all U.S. number, a big dichotomy between the larger farms in the dairy-centric states and the rest of the country. So we were in that camp, 1.5% was what we were thinking. Those were the numbers from both September and October, and so these numbers are definitely below expectations, a bit of a change in trend from the previous two months. With that number being up 0.9%, we also had a 60 million-pound downward revision in the October number, which represented a 0.3% decline.

So USDA originally reported a 1.3% all U.S. gain and now it's down to just 1% higher. We are getting more milk. I think there is, from a fundamental perspective, the first half of this year, we were down on milk production. And we hadn't been down on milk production since 2013. I mean, it's been four, five-plus years that we've been growing milk production. And so the poor economics in 2018 and in the early 2019 kinda did the market in. Farmers finally responded, which, you know, we rarely see. That said, the large scale farming communities, the ones that are larger that are more apt to hedging that have brought costs of production down, economies of scale, we feel like they've maintained, and are now starting to pick up that growth.

So one of the items in this production report that we saw that is notable, we didn't have any change this month from October to November from a herd perspective. But we now are in the 24 states which represents right around 96% of total milk production in the country. We're now above previous year on the overall milking herd while the all U.S. is down 27,000 head.

A special guest joins The Milk Check this month: Tom Gallagher, CEO of Dairy Management, Inc.

Ted, T3 and Anna ask about how DMI allocates the funds it collects from the Dairy Checkoff program; Gallagher explains why recent changes to DMI's advertising strategy position the industry to interact with today's consumers. (Spoiler: There's a reason you don't see "milk mustache" commercials on TV anymore.)

Gallagher also urges farmers to band together against aggressive animal rights groups who he says want to put dairy farms out of business.

 

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 on "The Milk Check," we interview Tom Gallagher, CEO of Dairy Management, Inc. DMI is responsible for increasing sales and demand for dairy products by spending the money generated through the Checkoff program.

T3: First, I'd like to say thanks for joining us today. We really appreciate you taking the time to discuss DMI and some of DMI's activities and the Checkoff program. And I think the best place to start this conversation would be Tom, tell us about the Checkoff program and how the money is used and where DMI is spending Checkoff dollars today.

Tom: Okay. Well, on the Checkoff money we get money, $0.15 per hundredweight that is provided by dairy farmers by law to the Checkoff. And $0.05 of that goes to the National Dairy Board and $0.10 goes to local promotion groups. So let me start there and also state that the Checkoff's been in place since 1983 when dairy farmers approached Congress and said, "Look, the government is sitting on 17 billion pounds of excess product. That's not good for the government, it's not good for taxpayers, it's not good for dairy farmers. We have had a voluntary Checkoff for years. We'd like a mandatory Checkoff and we will fund it. We will pay for USDA oversight because we believe farmers need a voice in the marketplace." And since that time, we have seen per capita consumption grow 75 pounds per person in the United States. And prior to that, which really shocks a lot of people, in the early decades of the 1900s, per capita consumption was on a straight decline until just about the time the Checkoff went into place.

So we take that money that we receive and we do a number of things with it. We have an export company that is run by former secretary Vilsack from USDA. And there are 120 members of that company that export dairy products. And through that company, the Checkoff funds about $20 million in marketing activities. The 120 members fund about $1.5 million that can be used for policy, trade policy, so the dairy in the street speaks with one voice, which is really a very, very powerful and important thing to do as an industry to make sure that we're unified. And it's necessary to have those member dollars because Checkoff cannot do lobbying. So with that, that company was created in 1995 by processors, manufacturers, traders, farmers. And then the Dairy Management organization itself focuses on increasing sales and trust. So maybe I should stop there and let you take it deeper.

Ted: Roughly what percentage of the Checkoff money goes to USDEC? Keeping in mind that Jacoby & Co. is one of the original members of the USDEC. And we greatly value the assistance that USDEC has given our company in marketing products overseas.

Tom: Yeah. Well, and we appreciate that you were an early member. And so Dairy Management, Inc. was formed by the National Dairy Board, which gets the nickel, and that's about $100 million. And then state and regional organizations that get the $0.10 but not all of them are members. So they have about $100 million to $120 million. Not all state and regionals are members.