Guest Editorial
Is the U.S. (or California) ready to be a long-term exporter of milk proteins?

by Bill Van Dam

Bill Van Dam joined the Alliance of Western Milk Producers as CEO and executive vice president in January 2007. The Alliance is made up of three California cooperatives which market about 62 percent of the milk produced in California. He is a guest columnist for this week’s issue of Cheese Market News®.

The worldwide demand for milk proteins (in all their dry forms) and lactose has taken the milk pricing systems in this country on an unprecedented ride. In July of last year, nonfat dry milk (NDM) was selling to support at 80 cents a pound. Now it is selling for about $2.00 a pound. Dry whey in July 2006 was selling for 29 cents a pound but had climbed to more than 80 cents by May of this year. Dry whey prices have dropped considerably since May but are still more than 40 cents and showing signs of finding a bottom near this price.

Cheesemakers across the country have complained that the whey values in both the California and federal order formulas have tacked an unreasonable whey value to their Class 4b or Class III minimum prices. Smaller plants that cannot justify installing their own whey processing are particularly angered. At its peak in California, the whey component added just more than $3.00 per hundredweight. That amount, however, is dropping quickly as dry whey prices fall. In August of 2007 it was $1.75. By way of comparison, if dry whey prices were to drop to 40 cents, the contribution would be only 77 cents.

This country produces an amazing volume of whey powders. In July 2007, the total was 193 million pounds (dry whey, 95 million pounds; lactose, 65 million pounds; and whey protein concentrate, 33 million pounds). By comparison, NDM production was 130 million pounds (of this 19 million pounds were skim milk powders). All of these products are in big demand worldwide, and it is expected to continue to be so for several years. But is this country ready to consider itself a major exporter? To do so it must have a pricing system that enhances the export trade and not one that hinders it.

There are two general problems with our present system. The first is the lack of accommodation for long-term fixed price contracts. The second is the lack of stability in the relationship of values between dry whey and WPC.

• Long-term contracts

Long-term fixed price contracts are the backbone of international sales. Because of the complexity of these deals it is rare to make the first delivery on a new contract within the first 30 days. NASS reporting for both dry whey and NDM prohibits the inclusion of long-term fixed price contracts if delivered over 30 days after the date on the contract. Long-term contracts that are indexed against current markets are included. The inclusion (or exclusion) of long-term fixed price contract sales is of interest to both NDM and whey product producers. Unlike cheese and butter, there is no active Chicago Mercantile Exchange market where buyers and sellers set the price of the commodity product. But a regulatory system that is based on end-product pricing needs an agreed value of the end product that will be used to determine the price the processor will pay the dairyman for his milk. There is but one really important consideration in choosing the base price for each commodity and that is that the product used represents what the processor gets from the market.

If long-term fixed price contracts are excluded from the formula base price, the processor making the long-term sale cannot be sure that the price he pays for his milk will be based on what he is getting for the commodity product made. Think on this a bit and you will discover that the only rational choice for the processor is to avoid long-term fixed price contracts. Since there is, to date, no opportunity for the processor to protect himself with hedges and other risk-sharing devices, the failure to include long-term contracts will force our U.S. dairy industry into the role of short-term suppliers to the world market. This argument applies equally to the whey and NDM trade. If we are serious about participating in world trade in dairy proteins, we need to have our system set up to include all the prices received for qualifying commodity product, no matter the length of the contract.

• Whey value relationships

Both California and the federal order base the whey value calculations on the price of dry whey. Based on the history of relative values of dry whey and WPC prior to November 2005, this was not a problem. But since then there has been a dramatic inversion of the value of protein in dry whey compared to the value of protein in WPC. This has caused the value of the whey component in the two formulas to increase faster than the values of the WPC complex. For an end-product pricing system to work, the processor must be able to get the value from the market and that was difficult (if not impossible) for a while earlier this year. Values have now corrected but some discussion must occur on how to adjust the formulas to more accurately reflect the relative values of dry whey vs. WPC.

The milk production reports indicate a fairly strong response to the current milk prices. It is clear that world demand is what is driving the prices now being paid to producers. The industry should set itself up to be suppliers to the world.

CMN

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