In The Headlines

Dairy Farmers Innovate to End the Glut of Milk

Farmers in the U.S. are pouring out tens of millions of gallons of excess milk, amid a massive glut that has slashed prices and has filled warehouses with cheese. More than 43 million gallons of milk were dumped in fields, manure lagoons, or in animal feed. Additionally, more milk was lost on truck routes or discarded at plants in the first eight months of 2016, according to data from the U.S. Department of Agriculture. That is enough milk to fill 66 Olympic swimming pools, and the most wasted in at least 16 years of data.

Desperate producers are working to find new uses for the excess, like getting more milk into school lunches as well as in revamped tacos, and Egg McMuffins. But many cannot even afford to transport raw milk to market at current prices, which have plunged 36% on average since prices hit records in 2014. “Everyone has dumped milk, from Minnesota to New England,” said Ken Nobis, head of the Michigan Milk Producers Association.

Dairy and meat producers in the U.S. and abroad expanded their operations two years ago in response to a shortage, setting the stage for the current global glut. American farmers are in the process of harvesting record-large corn and soybean crops, and meatpackers are now producing the most ever meat and poultry. As a result, food prices in the U.S. have plummeted and farm incomes this year are headed for their third consecutive drop. The USDA recently pledged to buy about $20 million of cheddar cheese to help struggling dairy farmers, the second time it has intervened in the market in less than three months.

The Michigan Milk Producers Association, a farmer-run cooperative, has added shifts at its dairy plants in Ovid and Constantine and bought equipment to handle an additional million pounds of raw milk each day. As the market has softened, the group has donated 83,000 gallons of milk to a food bank. Even so, over the summer, the co-op had to dump a batch of excess skim milk into lagoons of manure because it couldn’t find a trucker to haul it to a plant with spare capacity in Wisconsin. “Any milk disposal is a very difficult decision,” said Mr. Nobis. “No one gets any value whatsoever out of it.”

Meanwhile, Dairy Management Inc., a de facto marketing firm that is paid for by America’s 43,000 dairy farmers, has invested tens of millions of dollars in the past year to develop new milk-heavy menu items with McDonald’s Corp., Yum Brands Inc.’s Taco Bell, Domino’s Pizza Inc. and about 10 other companies it calls “dairy partners.” Food scientists and dietitians funded by DMI worked with McDonald’s, for instance, to replace liquid margarine with butter in its breakfast egg sandwiches, muffins, buns and other menu items. The new recipe was introduced at 15,000 restaurants in September 2015. McDonald’s spokeswoman Becca Hary said switching to butter was part of the chain’s “customer-led” shift to source simpler ingredients, and contributed to “a double-digit percentage increase in Egg McMuffin sales.” With Taco Bell, the dairy group created the “Quesalupa,” a cheese-laden cross between a flat quesadilla and a firm-shelled chalupa that made its debut in February.

DMI ramped up spending on strategic partnerships last year to over $30 million, more than double the investment six years ago when the group first began researching and developing new products with companies. Thanks in part to cheesier pizzas and more buttery buns, commercial use of those two dairy products was up 4% in the year through July. On average, each American last year ate an extra pound of cheese and butter combined, according to the latest USDA data. That has helped the industry combat a decades-long decline in the consumption of fluid milk by Americans. McDonald’s switch to butter alone is projected to use up to 600 million pounds of milk annually. “If you create the innovative products that people want, in the ways they want them, you can be successful,” said DMI Chief Executive Tom Gallagher.

Even organic dairy farmers, whose costs can be as much as double those for conventional producers thanks to their smaller scale and pricey feed, have resorted to selling milk to faraway or conventional plants to get rid of it, sacrificing their price advantage. “There are California producers so desperate to move organic milk they’re coming after our market in Atlanta,” said Eric Newman, vice president of sales at Organic Valley in La Farge, Wis. The dairy cooperative this year shipped organic milk powder to a customer in Europe at a steep discount. “It’s a mess,” Mr. Newman said.

Citations

1. http://on.wsj.com/2dJwNrH – Wall Street Journal
2. http://bit.ly/2ed7112 – CoBank.com

Education Publisher Pearson Sees the Future in Online Learning

Every day, Natalie Hilton travels past the university in central where she is a student. She listens to lectures on the bus as she studies towards a master’s degree without ever setting foot on campus. Hilton, a 24-year-old with a full-time job in advertising, is part of the first intake at King’s College London to study a fully online course to enable her to work in mental health. The scheme is produced by Pearson, the world’s largest education publisher, which is looking to online higher education courses to help revive its fortunes after a downturn in its traditional textbooks and marketing businesses.

If the model succeeds with Pearson handling the marketing, recruitment, and design of online courses, it could help open up higher education by providing fresh impetus to distance learning and also save money for cash-strapped universities. “The level of resource to do this in an absolutely first-rate way is probably beyond most institutions,” said King’s principal and president, Professor Ed Byrne, explaining the decision to work with Pearson. “We see this as bringing a King’s education to a larger, wider group of students.”

It could also improve Pearson’s finances. The company, which sold the Financial Times newspaper and its stake in The Economist magazine last year to concentrate on education, has been hit by several profit warnings in recent years. As the economy recovered in its biggest market, the United States, more people went into employment than education. It has also suffered from students borrowing or buying second-hand books, and a row in the United States over testing standards. Pearson’s online program management (OPM) business made $277 million in revenue last year, a fraction of the $5.4 billion the group made as a whole, but analysts forecast it will grow at a double-digit percentage in the next few years. Nearly all of the division’s revenue currently comes from the United States, where it is providing online courses at more than 40 universities and competes with the likes of 2U, Academic Partnerships, Bisk, and Wiley Education Solutions.

Pearson believes its size gives it an edge because its OPM division can benefit from the expertise and products of its other education businesses. “Digital opens up big opportunities for Pearson to improve access and outcomes in higher education,” said Pearson’s global head of product Tim Bozik. The company is also hoping to get a head start on competitors in Britain, its second-largest market, where it says the deal with King’s is the first of its kind.
Hilton’s Masters in Psychology and Neuroscience of Mental Health is designed and taught by King’s professors and tutors, through an online platform including video lectures, tutorials, and course materials, academic and personal support. While she could finish the master’s degree without once meeting her tutors, she has weekly video conferences with them, and a virtual message board stimulates conversation and debate with professors and other students from around the world.

As well as the psychology master’s degree, King’s offers a law program online. At $18,560 and $20,700 respectively for the full 12-module course, the online degrees cost as much as attending the university in person. The courses thus provide a lucrative opportunity for universities to expand without being limited by the physical space of the university campus, backed by Pearson’s logistics. King’s aims to expand to 5,000 online students in the next five years and broaden the portfolio of online courses offered.

While the growth potential of these courses is in theory limitless, Pearson emphasized there was no incentive to enroll huge numbers of students, as selectivity was a big part of the appeal of institutions such as King’s. Hilton, for one, is sold: “I have found it wonderful,” she said. “I would never go back to physical learning.”

Citations

1. http://for.tn/2e7hZSg – Fortune
2. http://ubm.io/1qt1L6o – Information Week

The Good News Is . . .

• The number of Americans filing for unemployment benefits held at a 43-year low last week, pointing to sustained labor market strength. Initial claims for state unemployment benefits were unchanged at a seasonally adjusted 246,000 for the week ended Oct. 8, the lowest reading since November 1973, the Labor Department said. Claims for the prior week were revised to show 3,000 fewer applications received than previously reported.

• FedEx Corp., a leading package delivery company, reported earnings of $2.90 per share, an increase of 19.8% over year-earlier earnings of $2.42 per share. The firm’s earnings topped the consensus estimate of analysts by $0.09. The company reported revenues of $14.7 billion, a 19.4% increase. Management attributed the results to strength in its ground shipments segment and contributions from its TNT Express acquisition.

• Japanese insurer Sompo Holdings said that it was buying Endurance Specialty Holdings, which is based in Bermuda but focuses on the United States market, for $6.3 billion. Sompo will pay $93 per share. The deal comes as the company bets on nursing and other health care services in Japan as Sompo’s home market grows older. The Bank of Japan’s embrace of negative interest rates has also made overseas investments more attractive, and a relatively strong yen made the purchase easier. The agreement follows a string of deals involving Japanese insurers who are looking for overseas growth as their home market shrinks.

Citations

1.  http://reut.rs/2dNeE9h – Reuters
2.  http://cnb.cx/1gct3xa – CNBC
3.  http://bit.ly/2ddaM5o – FedEx Corp.
4.  http://nyti.ms/2ebHsNV – NY Times Dealbook

Planning Tips

Guide to Understanding the New Dept. of Labor Fiduciary Rules

Retirement accounts are a big business for advisors, broker-dealers, and the institutions that hold and invest your savings. As of the end of the second quarter of 2016, for example, IRA assets totaled $7.53 trillion, according to the Investment Company Institute. On April 10, 2017, the Department of Labor (DOL), the federal agency that oversees retirement plans, enables its so-called fiduciary regulation. Below are some guidelines on what these new regulations may mean for your investments. Be sure to consult with your financial advisor to get more detailed information on the DOL’s new fiduciary rule and its implications for you.

What is the new regulation trying to achieve? – The intent of the regulation is to create an enforceable best interest standard and rein in potential conflicts that are not in the best interest of the investor. Before the rule, financial advisers were subject to a looser suitability standard when overseeing retirement accounts, meaning that they were obligated to recommend investments suitable for your situation. Now, brokers, registered investment advisers, insurance agents, or other types of advisers are subject to the fiduciary standard, meaning they must put your best interest first.

How the rule affects your relationship with your advisor – This rule does not affect regular brokerage accounts. It is applicable to retirement accounts, IRAs, and the advisors who handle them. If you are already paying flat fees or a percentage of assets managed, rather than commissions, very little may change in your relationship. However, if your advisor has been receiving commissions, expect to get paperwork from him or her. In that case, if you have an IRA, this paperwork will include the “best interest contract,” a document that states that your advisor and his or her firm will act in your best interest—as a fiduciary. This contract will require any conflicts of interest to be disclosed. You will also be notified of legal remedies available to you. Finally, you will also receive details on the services your advisor will provide and the associated fees you will pay.

Is this the end of commission-based service? – No. The new rule does not end commissions for everyone. The “best interest contract” allows your advisor to continue receiving these payments, provided his firm meets certain conditions. This includes ensuring that advisors do not receive incentives for acting against your interests, such as steering you to a particular mutual fund or annuity just because they get paid more for it. Some firms are adjusting their compensation models in anticipation of this requirement. Your best interest contract will have more details on these types of arrangements, their associated fees and how your advisor’s firm will mitigate those conflicts of interest. If the service is commission-based, the retail investor will get more information on the various forms of compensation that the broker-dealer and advisor have received. That disclosure will also bring to light other forms of compensation that the broker-dealer and advisor can get, for example, revenue sharing, sponsored conferences, and 12b-1 fees.

Will fees go up? – It depends. Some fund providers are cutting fees to help advisors make the transition to comply with the regulation, as consumer advocates and even the White House have pointed out how higher fund expenses in IRAs can eat away at returns. Whether your advisor will charge more, however, will vary. There is some debate in the industry that if a firm wants to move a client to a fee-based account as opposed to a transactional cost from commissions it could cost the investor even more. Going forward, fees will likely reflect the service you seek. If you really need a higher cost, actively managed model, then you should ask for it. If you want to do the research yourself, but you want a second opinion, then that may be lower cost. Some firms might also be inclined to offer clients a robo-advised option.

What will happen if you roll over your 401(k) to an IRA? – Expect your advisor to provide you with more documentation as you shift assets out of a company-sponsored retirement savings plan. For anyone to recommend that a 401(k) participant take money out of a plan and roll into an IRA, they will have to consider the participant’s situation and needs and make a best interest recommendation. Your advisor has to demonstrate a comparative analysis of the investments available, expenses and the service available in the plan versus in the IRA.

Citations

1. http://bit.ly/2ehuYiu – Investopedia
2. http://read.bi/2esr37y – Business Insider
3. http://cnb.cx/2ecC2hF – CNBC
4. http://cbsn.ws/1VAZohi – CBS News
5. http://bit.ly/2edc2H9 – TrustedAdvisor.com