Guest Editorial
Success despite federal orders

by John Umhoefer

John Umhoefer is executive director of the Wisconsin Cheese Makers Association. He contributes this column monthly for Cheese Market News®.

Wisconsin’s cheese manufacturing industry weathered negative margins this year, delaying growth and pouring red ink over financial statements. But the industry has survived with valuable plant assets intact.

Production data, and a new state budget, contain some promising news for an industry recovering from record-low margins. And while federal milk pricing remains a serious problem, cheese businesses in Wisconsin have accelerated product innovation and marketing and are poised to survive and thrive into 2008 and beyond.

Wisconsin cheese production grew 2.5 percent to 2.47 billion pounds in 2006, slightly ahead of average growth in recent years. Production of specialty cheese types, tracked by the state since 1999, grew 7.2 percent in 2006 to 386 million pounds.

Milk production continued its rebound in 2006. Wisconsin’s 1.24 million cows produced 23.4 billion pounds of milk, 2 percent more than the previous year. Wisconsin milk production peaked in the late 1980s, and the 2006 total is the highest milk production level since 1992.

This year (so far) tells a mixed tale. On the back of record high milk prices, milk production is up again, averaging 3 percent higher. Wisconsin likely will surpass 24 billion pounds this year, matching its second highest milk production total ever. Cheese production, however, is down 1.6 percent (through August) reflecting the lack of margin in making high-volume cheeses.

Wisconsin has initiated several legislative measures in recent years to stimulate dairy growth, from a tax credit for farm modernization to an agricultural siting law that provides statewide guidelines for permitting livestock operations. These programs provide incentive, but it’s individual decisions by dairy farm families that have expanded the size of Wisconsin’s dairy herd and lifted production per cow.

Last week, the state of Wisconsin completed a new, two-year budget (four months overdue) to include a modest tax credit for manufacturers. Wisconsin Cheese Makers Association partnered with Dairy Business Association to conceive and push for the new Dairy Manufacturing Facility Investment Tax Credit. Wisconsin’s Democratic Governor Jim Doyle offered the tax credit in his original budget package and state Rep. Brett Davis championed the legislation among Republicans for a successful bipartisan effort.

Other organizations, such as Wisconsin Farm Bureau and Wisconsin Federation of Cooperatives, offered crucial support for the concept.

This new program for cheese and dairy manufacturers in Wisconsin offers a tax credit (on individual income, corporate income or franchise taxes) up to $200,000 per claimant. The total amount of credit approved in the budget is $1.3 million.

Cheese and dairy manufacturers investing in building construction, production equipment, utilities, packaging, warehouse equipment, waste treatment systems and computer software and hardware can take 10 percent of their investment as a tax credit. The state Department of Commerce will promulgate rules to define how this pie will be divided among multiple companies seeking a credit. WCMA has, through work with Rep. Brett Davis, drafted language seeking to assure that manufacturers large and small will have equal access to the credit dollars.

The new state budget includes other positive, dairy-related support:

• The Wisconsin Department of Agriculture, Trade and Consumer Protection (WDATCP) gained $6 million in cost-sharing dollars for dairy producers to develop nutrient management plans.

• Another $7 million at WDATCP will provide cost sharing dollars to farmers to improve manure storage and barnyard runoff control practices.

• Wisconsin’s “Discovery Farm” research system earned $250,000 in new funds.

• WDATCP gained $350,000 to slightly offset rising costs in its food safety division.

These incentives will assist in the retooling of Wisconsin’s dairy industry. But flawed federal milk price formulas remain to reap profound if unintended consequences.

This year, cheese manufacturers reacted to a government pricing formula, rather than the marketplace, in setting cheese production schedules. And today, dozens of Wisconsin manufacturers are contemplating multi-million dollar expenditures in whey processing equipment to attempt to capture greater value from whey and afford the Class III milk price.

As noted above, negative margins in 2007 did stimulate product innovation and marketing. But it is wrong to find government price formulas, rather than market opportunities, driving industry makes, investment and marketing.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.