Digest Highlights: Rabobank sees fat demand outpacing production. California 2016 cost of production data released. Senate proposal shortens machinery depreciation schedule. Find a summary of these and other dairy news here.
Rabobank: Milk fat demand outpacing production
Global milk production is poised to grow during the remainder of 2017, with stronger demand boosting trade, according to the Rabobank Global Dairy Quarterly. Despite that growth, milk fat production will continue to struggle to meet demand.
With improving margins over feed costs, U.S. milk production will grow, said Rabobank Dairy’s Kevin Bellamy. U.S. consumption of butter and cheese will also continue to drive solid domestic demand growth. Thanks to a slightly weaker U.S. dollar, exports will be firm.
In Europe, farmers in Ireland, Poland and Italy have continued to expand production, with the United Kingdom also adding a late production spurt in the second quarter of 2017. However, overall European production has grown more slowly. Germany and France, the two largest producing states, fell well behind last year’s production levels throughout the first half of the year. The weak production growth in the European Union, at a time of year when butterfat levels are naturally depressed, and the strong demand growth in the U.S., have contributed to a global shortage of butterfat. On the other hand, weaker milk supply in Europe has led to less need for surplus protein to enter public stocks.
South American production recovery continues to be slow, but steady.
Looking forward to the remainder of 2017, optimism in New Zealand and Australia is the highest in three years.
In China, farm prices have been weakening, restricting volume growth. Even mediocre consumption growth has managed to outstrip supply. In addition, tighter infant formula regulations appear to be benefiting importers. Rabobank expects China’s import levels will need to grow dramatically in the second half of 2017.
Dairy groups urge USDA to move quickly on school milk rules
School is out for summer, but U.S. dairy organizations are urging Secretary of Agriculture Sonny Perdue to quickly finalize plans to ensure low-fat flavored milk can return to school menus for the 2018-2019 school year.
In a joint letter, the National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) requested the USDA finalize regulations by October 2017.
"It is critical that the regulatory process move quickly so schools can include low-fat favored milk in their menu planning and procurement processes and so that milk processors will have ample time to formulate milks to meet their needs,” said Michael Dykes, IDFA president and CEO. “Consumption of milk in schools dropped dramatically when only fat-free flavored milk was permitted in 2012,” said Dykes.”
In May, USDA’s Food and Nutrition Service (FNS) issued a memo to regional and state nutrition program directors that “strongly encourages” state agencies to grant exemptions allowing schools to serve low-fat flavored milk during the 2017-2018 school year.
However, the dairy groups explained in the letter, the process most schools use for the solicitation of bids for an entire school year would likely delay procurement of low-fat flavored milk until January 2018 for the following school year.
In early May, Perdue announced plans to give school feeding programs more leeway in meeting meal program nutritional requirements, and give students more flavorful dairy options.
Read: Dairy getting upgrade in school feeding programs
California dairy: 2016 better, but still tough
The California Department of Food and Agriculture’s (CDFA) annual cost of production summary reflected what farmers already knew: While 2016 was a better year than 2015, dairy economics were still tough. Although production costs declined more than milk prices, 2016 was the second consecutive year of losses for typical California producers.
The 12-month average price paid to California producers for farm milk in 2016 was $15.03 per hundredweight (cwt), down 2.4 percent from 2015. In 2016, the total cost to of production was $16.53 per cwt (not including a return on investment and management), down 7 percent from 2015.
New to this year’s report was an analysis of the makeup of California’s milking herd. Based on fat tests, CDFA estimates the volume of milk produced by Holsteins, Jerseys and mixed and other breed herds. (Mixed herds can be crossbreds or herds milking both Jerseys and Holsteins in the same facility.)
Holsteins are still the prominent breed of milk producers in California, but they’re declining. In 2016, the production share of total California milk production represented 78.2 percent of the total, down from 91.2 percent in 2005.
The Jersey breed’s estimated percentage of California milk production increased from 4 percent in 2005 to 11.6 percent in 2016. Milk production from mixed and other herds has increased from 4.8 percent to 10.2 percent.
Jersey, Holstein data compared
The National All-Jersey Equity Newsletter further analyzed data in the California Department of Food and Agriculture’s (CDFA) annual cost of production summary. CDFA surveyed milk price and cost data from 14 Jersey herds and 73 Holstein herds, representing about 9 percent of all dairies and 9 percent of the state’s total milk production.
It showed a 2016 Jersey “mailbox price” of $17.88 per cwt, down 41 cents from 2015. At 19,283 pounds of milk production, the average Jersey generated $3,448 in gross milk income during the year.
The 2016 Holstein mailbox price was $14.57 cwt, down 59 cents. At 24,744 pounds of milk production, the average Holstein generated $3,605 in gross milk income during the year.
Overall feed costs for all herds decreased 11.9 percent from 2015. Feed costs for Jerseys decreased $1.63 per cwt, while Holstein costs were down $1.26 per cwt. Based on hundredweight of milk sold, Jersey total feed costs ran $1.75 more than Holsteins.
Using the herd-reported milk prices and cost data, Jerseys posted income over feed costs of $7.70 per cwt., compared to Holsteins at $5.77 per cwt. Income over feed costs for 2016 increased 18.9 percent from 2015 for Jerseys, and 13.3 percent for Holsteins.
Proposal shortens ag depreciation schedule
A bi-partisan proposal would amend the U.S. tax code, setting a permanent five-year depreciation schedule to help farmers purchase new equipment and replace worn-out machinery. The Agriculture Equipment and Machinery Depreciation Act was introduced by U.S. Sens. Pat Roberts (R-Kansas), Amy Klobuchar (D-Minnesota) and Jon Tester (D-Montana).
Under the tax code, taxpayers are allowed a depreciation deduction to allow them to recover the costs of investing in certain property, like farm machinery and farm-use motor vehicles. The recovery period for the deduction should match the useful life and financing of that property.
The current tax code sets a seven-year depreciation cost recovery period. According to surveys from the Farm Service Agency, on average farmers and ranchers finance farm equipment and machinery for five years. 
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Dave Natzke
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