On Board With The Chairman - June 2024
This month’s Board meeting was held on Thursday, June 27, a couple of days later than normal due to a conflict with an industry conference for California milk handlers. As we are now squarely in the summer travel season, we also had a few missing directors, so as First Vice Chairman, I had the honor of sitting in as Chair for this meeting.
The first order of business was to introduce Jason Allen, CDI’s new Chief Financial Officer, with Phil Girard’s pending retirement from CDI. Phil will be greatly missed, and there will be a time in the not-too-distant future to recognize his many years of service, but this meeting was a chance for the board to meet Jason. With a 13-year stint at The Hershey Company and time spent in management positions at Olam Americas and AC Foods(both ag-based organizations), Jason comes into this position with some unique perspectives, and we look forward to watching him grow in that position as he combines his experience with a new and growing knowledge of CDI and the dairy industry.
Moving into the business portion of the meeting, Brad started the management presentation with an update on international markets. There are both “bearish” and “bullish” indicators, so determining where prices are headed and how quickly they will get there can be challenging. On the bearish side, sagging Chinese demand for dairy, elevated skim milk powder (SMP)production out of Oceania, and significant recent weakness in the Mexican Peso have created headwinds in the market. On the bullish side, U.S. prices are in general alignment with international prices, which preserves export opportunity on a pricing basis, and while international production has seen some recent strength, it is at lower component levels. After considering all those factors, the market appears to be on a general upward trajectory (at least for milk powder), but how high and how soon are still very big questions. Brad closed out his report with an update on the construction of Valley Natural Beverages(VNB), which is progressing nicely, and other key initiatives related to CDI margin improvement, all of which were at least referenced in the Annual Meeting a few months ago.
Phil then took the board through his monthly update on CDI financial metrics. The quarterly Finance Committee meeting, the day before the Board meeting, included a much more in-depth look at the cooperative’s finances, but the Board was presented with May and Year-To-Date updates on profitability. The good news is that the cooperative is profitable and trending well ahead of the year prior as core business operations show signs of improvement from key initiatives aimed at operating efficiency. That said, our profitability still relies on depooling revenue, which was expected based on management forecasts. However, it is a clear reminder that the initiatives to transform the cooperative, such as VNB, Lactoferrin production, and other items discussed in the Annual Meeting, need to continue to be the primary focus for management and the rest of the CDI team. Looking in the months to come, Class III and IV prices have converged and depooling revenues are expected to be minimal in the near future, so as the transformation initiatives continue to be executed, the board is going to be very conservative about when and how to distribute profits prior to year-end.
Patti Smith of DairyAmerica was the next presenter to the board, reviewing first-half powder markets and powder sale performance, as well as a forecast on what is likely to be seen in the second half of 2024.Fortunately, the futures markets are anticipating some level of upward movement in powder markets in the second half, so the DairyAmerica sales team is positioning themselves to try to balance margin generation with inventory management, with a higher focus on margin generation. Patti then gave an update on the additional international sales resources DairyAmerica will be deploying as part of a co-funding agreement with DMI, the national checkoff program. Finally, Patti gave an update on the execution plans for multiple value-add offerings in the marketplace, including Milk Protein Concentrates, High Heat SMP, and Lactoferrin – all of which are key elements of the transformation plan previously referenced.
Michael Burdeny of Challenge Dairy Products then gave his update on the consumer-facing side of our business, including both branded and private label butter and the market development for VNB. The Challenge DairyProducts board had met the day prior for a much deeper dive into that side of CDI’s business, so the board presentation was a higher-level summary of key initiatives. In addition to regular updates on Year-To-Date performance and balance-of-the-year forecasts, Michael also gave a review of current market conditions, including the effect that inflationary pressures are having on shoppers as they are “trading down” from branded products to private label in increasing volumes. Michael also gave a market update on fluid milk products, along with a progress report on securing sales volumes for VNB. It’s clear that buyer interest is growing rapidly as visual progress is made in constructing that plant, and the project now moves from concept to reality, which buyers can see.
Next up was Dennis, who provided his monthly review of plant operations. There are certainly some positive items to report on, including stronger year-over-year retail butter and SMP production. Meanwhile, there are also areas of continued focus for improvement, including overall costs of processing and plant efficiencies. Dennis provided specific updates on key initiatives in those areas, as manufacturing efficiencies will continue to be a key to CDI’s success, regardless of how many value-add projects we can incorporate into our business.
Finally, Rob wrapped up our meeting with an update on membership, milk production, and milk price trends. Additional reports included an update on industry discussions around the future of the Cooperatives Working Together (CWT) program, which CDI does not participate in, but is subject to renewal by the end of this year. Finally, Rob was able to provide an update that the Federal Milk Marketing Order (FMMO) recommended decision is likely to be released near Monday, July 1, based on comments made by USDA officials at a recent California Creamery Operators Association Annual Meeting. So members should expect to hear more on that issue in the coming days.
Wishing my fellow CDI member-owners a wonderful Independence Day, as we take time to appreciate the freedoms we are given, and praying for safety for our employees and animals as they deal with this intense stretch of heat we are embarking upon.
Best,
Neil Zwart
Vice Chair
