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Estimates coming in assessing the impact of this summer's high heat, including a Sept. 12 USDA report that lowered its estimate of this year’s corn harvest by 3 percent below the previous month's forecast, continue to drive up commodity cost predictions. Those forecasts, coupled with a continuing hay shortage in the country, are continuing to pressure milk and dairy prices upward. The department predicts that even though farmers will continue to increase milk production slightly into next year, exports will also rise through 2011 before softening slightly in 2012. USDA reports in spite of increased milk production for each of the last several months, dairy prices continue to climb. Overall retail dairy prices were up 1.2 percent from June to July. Dairy prices are just under 8 percent above the July 2010 level. The The Chicago Mercantile Exchange product breakdowns go like this:

• All Milk: Up 4.25 percent for the month; almost 39 percent compared to the same month last year.

• Cheese: Block cheese up 0.74 percent for the month; 36 percent compared to the same month last year. Barrel cheese up 3.13 percent for the month; 39.3 percent compared to the same month last year.

• Butter: Down 3 percent for the month; up almost 15 percent compared to the same month last year.

Why the continuing rise, even in the face of slowly increasing supplies, and where’s the end?

Despite continuing pain caused by almost nonexistent profitability at the farm gate, retail dairy prices are being driven by a combination of high fuel prices impacting the distribution chain coupled with strong demand driven by dairy commodity exports.

USDA's milk production report for June milk production showed production up 1.4 percent from a year ago for the 23 reporting states; 1.1 percent for the entire country. Milk cow numbers likewise continue to increase, with estimated U.S. cow numbers up by 10,000 head in June and 0.9 percent higher than a year ago. Cow numbers have increased each month beginning in October of last year. However, the latest milk supply increase is the smallest relative increase this year. Increases have been below 2% since April.

Dairy demand in southeast Asia, particularly Korea and Japan, has increased significantly in recent years, and now the weakened dollar has multiplied the effect. Dairy exports have added strength to nonfat dry milk, cheese and butter prices. Compared to year ago, first quarter exports of nonfat dry milk and skim milk power were more than double, total cheese exports were 86 higher and butter exports were almost double. Calculated on the basis of solids, 13 percent of all U.S. milk production is now being exported.

When demand driven by domestic sales and strong exports remains strong, the question of when prices cool off will come down to how much milk we farmers produce this summer and fall. As always, much of that question hinges around expectations for our largest input cost: feed. Feed prices will remain high, although some relief is expected with the supply increase accompanying the new crop harvest. However, the southern drought is taking a heavy toll on the all-important hay supplies dairies rely upon. Western supplies of hay remain tight; stockpiles on May 1 were 63 percent below a year ago in both California and Idaho, the lowest in more than ten years. However, despite the higher feed prices, returns over feed cost remain in the black. As a result, dairy farmers have been producing all the milk they can, trying to play catch up on the losses we took during what amounted to a milk price depression of 2009.

If milk production continues at this slower growth, it increases the probability that milk prices can hold near current levels and in fact show strength this summer and fall. Watch carefully the outcome of this year’s crops. It will be a key factor affecting the number of milk cows, milk per cow and total milk production going into 2012. We’ll keep you apprised.

Why it’s important to consider economic realities when addressing your customer’s concerns; plus how farmers and retailers may have more in common than you think.

Your customers have seen the headlines:

  • "Many analysts say the era of cheap food may well be over as rising crop production struggles to keep pace with soaring global demand..."
  • "Food prices increase most in 36 years," CBS News breathlessly reported in March.

  • “Clothing prices hold steady no longer,” said the Boston Globe in early April. “We're now at a point where it's hard to not pass some of those costs on to consumers," T-shirt maker John Gorat told a New York TV station.

In one sense, they’re correct. Take those cotton prices, for example. Prices paid to farmers of cotton have risen about 150 percent since last summer, reaching their highest point last winter since the Civil War 150 years ago. Cotton has led a similar run-up in most of the major commodity prices, most notably corn and soybeans, not only which make up ingredients in most CPG center store items but also a large portion of which are used as feed by the farmers who grow your meat, milk and eggs.

Farmers understand consumers are looking to fix blame for those increases. However, retailers should be aware of some realities of farm economics, as underscored again by a recent report for the U.S. Department of Agriculture. And cotton, again, presents one of the most stark examples of how far farm prices have diverged from the realities of final product pricing.

Before this current run-up in cotton prices, for example, for every dollars’ worth of apparel and household textile products consumers have bought, the farmer’s share was estimated to come to just under 2.5 pennies. Likewise, for every dollar spent on bakery and cereal products, the wheat farmer has earned an average of about 7 cents.

The stark economic reality cotton farmers face is they could give away their farm products and it would cut the cost of clothing and household textiles by a meager 2.5 percent.

It’s a reality grocers need to help their customers understand. USDA’s latest “Food Dollar Series” released in February demonstrates not only how small todays share of dollar is for the farmer, but ironically how similar are the plight of both farmer and grocer. The report divides the consumer's food dollar into the value added for 10 industry groups as food passes from farm to plate: farm and agribusiness, food processing, packaging, transportation services, energy, retail trade, food services, finance and insurance, advertising, and legal-accounting-bookkeeping services. For year 2008, the freshest data available, the breakdown shows farmers and grocers share a remarkably similar share of that dollar: Just under 12 cents and 14 cents, respectively. In contrast, the food-service sector and processing sectors take up more than half the dollar, more than double the share of farmers and grocers combined. And absent more recent data, we can only guess, but it's reasonable to assume the share of transportation and energy will take a larger bite out of the post-2008 dollar.

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In another bit of ironic solidarity between grocery and farmer the report underscores, USDA notes that the food-at-home retail sector has followed another trend that mirrors farming: Using annual data on the total number of supermarkets, full-service restaurants, and limited-service restaurants per capita in the United States for the years 2000-08, as the chart below demonstrates, USDA shows the number of supermarkets has steadily declined during the past decade, even as the share of dollar going to the sector has held steady or declined slightly. Meanwhile, the number of food-service establishments continues to rise (pre-recession, anyway), as that sector captures the lion's share of the food dollar. What's it mean? Similar to the situation farmers have faced until this current boost in farm prices, fewer food retail stores per capita suggests that declines in the average price of food retailing services over the study period might have come from increasing economies of scale in the sector.

Food pricing is a complex topic, and grocers and farmers can and should work together to give consumers a more nuanced explanation than they're likely receiving in the media.

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Continued expected drought in the Southern Plains threatens to make those already tight beef supplies even tighter.

The latest estimates for the final size of the 2010 U.S. crop of cattle available for slaughter puts supplies at their lowest point since 1950. Worse still, supplies are expected to continue falling for the next three years. Now, adding insult to injury, severe drought throughout the Southern Plains -- the source of 25 percent of the nation's cow slaughter today -- threatens to accelerate the drain on cattle supplies.

Analysts now expect the supply of cattle available to go into feedlots, the final phase of growth before harvest, won't start to increase until 2015; beef, until 2016.

A U.S. calf crop predicted to be the smallest in a half century has led to some dire predictions. Some insights on what the numbers really hold in store.

The beef cow herd is changing...will it change ground beef supplies?The final tally for the 2010 U.S. beef calf crop is expected to be at its lowest since 1950 and, worse still, it's expected to continue falling for the next three years. According to analysts, that means the supply of domestic cattle available to go into final beef production, the feedlots, won't start to increase until 2015; beef, until 2016. 

USDA believes that while turning beef cow inventories around this year from their ongoing decline could be possible, it is not likely, especially with beef replacement heifer numbers at their January 1, 2011, levels. Cow slaughter — with only a minor weather related
break — is continuing thus far in 2011 at rates only slightly below the ending rates of 2010. The implications of continued cow slaughter in the face of the reduced beef cow herd, along with the expectation that some 7 percent fewer beef heifers will calve in 2011 than in 2010, are for a further reduction in the national beef cow herd during 2011. A smaller cow herd and any future heifer retention for breeding would likely lead to exceedingly tight feeder cattle supplies, at least through 2012 and 2013.

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Those extreme numbers have led some analysts to predict significant changes in the American beef sector. Cattle feedlots and packing plants that already can't buy enough animals to fill their capacity may be forced to shut down, even as retail beef prices rise on the heels of shortages. That could spell a longterm depression in demand for beef, which would dampen companies from returning to the market, even as supplies pick back up. One maverick analyst, Olathe, Kan., consultant Bill Helming, goes so far as to predict demand for ground beef, which can price competitively next to pork and poultry, will rise on the shortage of middle cuts, leading to a longterm shift in the beef market away from quality cuts and toward cattle finished specifically for the ground beef market.

Others disagree. Mark McCully, Director of Supply Development for Certified Angus Beef, says, "I've always believed and will continue to believe the American beef producer's global competitive advantage is in premium, grain-fed beef." Demand may temper for that high-quality beef, McCully believes, but it will not diminish significantly, especially as the world economy recovers. "Where else in the world do you have the combination of factors that add up to make high-quality beef more affordable? Every time the American farmer takes his eye off producing for high quality, we lose track of what made us successful."

His advice to grocers in the face of this market? Keep doing what you're doing. Highlight the inherent quality in beef, and look for opportunities to sell value of beef balanced against the cost competition of low end ground beef and poultry, and if the market does shift toward ground beef, capitalize on the upsell potential possible with premium ground beef.

 





 

 

Partners

In patnership with the Nebraska Grocery Industry Association

The Nebraska Grocery Industry Association was formed in 1903 by a group of Omaha grocery store owners, wholesalers and vendors to allow them to promote independent food merchants and members of the food industry, and to promote education and cooperation among its membership. NGIA continues to represent grocery store owners and operators, along with wholesalers and vendors located throughout Nebraska, by promoting their success through proactive government relations, innovative solutions and quality services. NGIA offers efficient and economical programs. NGIA also lobbies on both a state and national level, ensuring that the voice of the food industry in Nebraska is heard by our representatives.


Supported by the Nebraska Farm Bureau

The farm and ranch families represented by Nebraska Farm Bureau are proud sponsors of the Farmer Goes to Market program. We take great pride in supporting Nebraska's agricultural foundation. A key part of that effort is to make sure we produce safe and affordable food. This newsletter is an important part of our effort to connect the two most important parts of the food chain -- the farmer and the grocer -- with the goal of increasing consumer awareness and information about how their food is raised in Nebraska.


Supported by the Nebraska Corn Board

The Nebraska Corn Board, on behalf of 23,000 corn farmers in Nebraska, invests in market development, research, promotion and education of corn and value-added products. The board aims to work closely with the farmer-to-consumer food chain, to educate everyone about the role corn has in our everyday healthy lives. The Nebraska Corn Board is proud to sponsor the Farmer Goes to Market program to help bring its mission of expanding demand and value of Nebraska corn to the consumer, through the strongest touch point in that chain: the Nebraska retail grocer.


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