Washington Insider -- Tuesday

Organic Milk Cycles

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Next Steps in Investigation of Biodiesel imports from Argentina, Indonesia

The 5-0 vote by the International Trade Commission (ITC) May 5 is the first of four steps in the review of a petition from the National Biodiesel Board Fair Trade Coalition, which alleges that producers in Argentina and Indonesia are benefiting from government subsidies and selling the fuel in the U.S. at prices below their production costs.

The ITC, in its preliminary determination, found there is a reasonable indication of material injury — or a threat of it – to the U.S. industry.

The vote clears the way for the Commerce Department to continue its investigation into whether those foreign producers are in fact dumping their biodiesel and getting illegal government support.

The National Biodiesel Board is seeking tariffs of 23.3% on Argentina and 34% on Indonesia to counter dumping from those nations; the anti-subsidy tariffs the U.S. producers are seeking would be imposed on top of that. Imports from Argentina more than doubled to 10.6 million barrels last year. Just five years ago there were no imports of the fuel from that nation.

The Commerce Department schedule is as follows: Announce a preliminary CVD determination in June 2017 and a preliminary AD determination in August 2017, though these dates may be extended. It could take a year for the government to review and decide if import tariffs are justified on biodiesel, which is usually made from soybeans, palm oil or waste cooking oil. The domestic and foreign producers must now argue the merits of their case before both the Commerce Department. If the department backs the U.S. industry, the ITC will have to make a final ruling on injury at the end of the process, too.

The ITC decision at the preliminary phase is statutorily almost set up to default to the domestic industry, sources advise. But final determinations are much harder and sometimes do not result in wins for the domestic industries involved.

Any disruption in the biodiesel market could spill over into debates about U.S. renewable fuel policy and the federal mandates that compel refiners to use renewable fuel. The Environmental Protection Agency is set to propose 2018 quotas for biofuels and 2019 quotas for biodiesel within weeks.

Senate Ag Panel Hears Farm Bill Views in Michigan

Agriculture stakeholders said they wanted more investment in international development, better crop insurance and a steady agricultural workforce, during a Senate Agriculture Committee farm bill field hearing May 6.

Senate Agriculture Chairman Pat Roberts, R-Kan., said lawmakers will be forced to "do more with less" when developing the 2018 Farm Bill. Tight resources. Roberts said that while he would like to increase funding for the farm bill, lawmakers will need to find budget savings.

Panelists listed crop insurance as a top reason why their farms are viable. Senate Ag Committee Ranking Member Debbie Stabenow, D-Mich., noted that her staff is working with USDA Secretary Sonny Perdue to make milk eligible for crop insurance as a separate commodity from livestock, to give dairy farmers more options. Farm and milk groups said the main hurdle to offering more policies is a $20-million cap for the livestock sector.

While USDA has historically interpreted "livestock" to include both animals and products derived from animals, like milk, Stabenow and agriculture lobbyists want USDA to change course and determine that milk is an agricultural commodity that is eligible for a separate coverage category and cap.

Multiple farmers said the Conservation Reserve Program and Environmental Quality Incentives cost-shares have helped them plant cover crops that prevent soil erosion and improve water quality.

Washington Insider: Organic Milk Cycles

Bloomberg is exclaiming this week at sort of a new development, market cycles for organic milk. For some time, observers have struck by the booming demand for organic milk. Now there is a different reality. “While everyone from hipsters to housewives is drinking more of the stuff than ever, and paying twice as much as for conventional milk, the days of shortages are long gone.”

And, horror of horrors, “production has surged so fast in the past two years that some of the surplus is being sold at a lower price. A few dairies are just dumping what they can’t sell.” The wave of new supplies reflect an expansion of cow herds by farmers seeking the hefty premiums and growing market share for organic products at a time when most Americans are drinking less milk, Bloomberg says.

Organic milk remains a niche in the $40 billion dairy industry but sales have more than doubled in a decade, prompting companies including Dean Foods Co. and yogurt maker Danone to add organic products. To keep up with demand, the number of cows certified to supply organic milk has increased about 20% in the past two years, Bloomberg says.

“You’re seeing larger-scale organic farms and more developed transportation routes and efficiencies of scale,” said Ben Laine, senior economist at CoBank in Greenwood Village, Colorado. “It’s really evolved.”

Organic products sales are still small, about 5% of fluid-milk sales last year. However, that is more than double their 1.9% share a decade earlier, USDA says. And, demand is increasing in some regions even as fluid-milk sales reach their lowest level in more than two decades, said Darren Seifer, a food and beverage analyst for NPD Group in New York.

That’s helped sustain organic prices somewhat. Certified producers received about $36.25 per 100 pounds in the 12 months through November, $19 more than what they’d get for conventional milk, USDA says.

Organic costs more for several reasons, Bloomberg says. The cost of conversion is high and can take as long as three years. Producers are required to provide cows with organic feed, forgo antibiotics and graze the animals on pasture for at least 120 days a year. The process is also less efficient since organic cows produce only about 13,000 pounds of milk in a year, compared with at least 18,000 at conventional dairies, said Ed Maltby, executive director of the Northeast Organic Dairy Producers Alliance.

Still, increasing numbers of farmers have calculated that it is worth the investment to switch. That’s led to production increases that could lead to a “surplus of perhaps 50 million gallons this year,” according to Richard Mathews, executive director of the Western Organic Dairy Producers Alliance.

For the overall dairy industry, market pressure has been growing, especially as producers are in the midst of the annual “spring flush” season when new crop spring forage stimulates cows to produce their highest volumes of the year. As a result, dairy futures are falling, Bloomberg says.

Compounding the glut is a budding trade dispute with Canada that’s halted some U.S. sales north of the border. At the same time, Mexico, the biggest importer of American dairy products, is buying more from Europe and has been exploring talks with dairy powerhouse New Zealand.

Regulatory changes also may have played a role. The USDA in 2015 said it would tighten restrictions on sourcing organic livestock, pushing producers to add cows before the previous rules expired, according to Matthews. The proposed changes have yet to go into effect, he said.

The U.S. had 228,000 certified organic milk cows at the end of 2014 but that number grew by perhaps 40,000 head recently, according to Sean Mallett, a farmer in Twin Falls, Idaho, who is also president of the western alliance. Over that period, he expanded his herd by 10 percent to 1,500 milking cows. At the request of the processor he sells to, Mallet says he is now curtailing output.

Also, retail prices appear to be dropping in some areas. USDA reported the national average price for a half gallon of organic milk was advertised at $3.99 in the week beginning April 21, down 3.4% from the same week a year earlier—but still above the non-organic varieties at $2.47.

Still, the industry is buoyed by optimism, Bloomberg says. “Milk may be long right now, but it’s only a matter of time before demand catches up,” said Nate Lewis, senior crop and livestock specialist for the Washington-based Organic Trade Association.

More and more, it looks like the organic milk industry is facing production balancing problems similar to that of the industry at large.

The dairy industry has a chronic problem of productivity growth that exceeds demand growth—and depresses prices, often made worse by government interventions. Now it looks like the organic sector may well be subject to the same market forces. It will be very interesting to see how the smaller industry attempts to deal with these trends, efforts producers should watch closely as they emerge, Washington Insider believes.

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