DairyBusiness Update: March 17, 2014

Happy St. Patrick’s Day!

More Milk Means More Cheese and Demand is There
   Increased milk supplies are helping to increase cheese production, according to USDA’s Dairy Market News (DMN). Good demand from domestic buyers is credited with keeping block supplies tight. Buyers are looking to acquire inventory for Easter/Passover demand. Export demand continues to move a larger percentage of cheese stocks out of the country. FAS reported January U.S. cheese exports of 70.8 million pounds, up 46% from January 2013.

U.S. is Buttering Up the World
   Butter manufacturers are busy fulfilling good export orders, especially in the West, according to DMN, along with increased domestic retail demand for the upcoming Passover and Easter holidays. The market tone is firm as several butter makers are unable to grow inventories due to better than seasonal demand. Stocks of butter are light to moderate.

Export Market is in the Driver’s Seat
   Many 2014 Class III contracts reached new highs Sunday night as volume approached 300 contracts, reports FC Stone risk management consultant in this morning’s Insider Opening Bell. "The rally continues," says Hildebrand, "The export market is the driver for Class III. Cheese is leaving the country, with a lot of exports to the Middle East and Africa, and filling the gap in China."
   Most 2014 Class III contracts reached new contract highs Friday and the March-December average gained 33 cents on the week to $20.26. The weak dollar encourages exports that support prices, but Hildebrand sounded a warning over prospects for rising production."Now is the time of year when we will hit a wall of milk soon," he said. Production is up seasonally in the West, but, "It may be a while before Midwest production picks up."

China Demand Influence in Question
   Two weeks ago, I reported that the Daily Dairy Report’s (DDR) Sarina Sharp warned in the February 28 Milk Producer’s newsletter that “there are growing concerns about the health of the Chinese economy.” She reports that a Bank of America-Merrill Lynch survey of investment fund managers found that nearly half believe the possibility of a “hard landing” in China is the biggest tail risk to the global economy.
   She reported in the March 14 MPC newsletter that last week, Thursday; Chinese Premier Li Keqiang warned that the Chinese economy faces “severe challenges” in 2014.  
   Beijing is hoping to enact reforms that will allow for slower but more sustainable growth, according to Sharp, but such growth may prove elusive. The pace of investment, retail sales and factory output has fallen to multi-year lows. Chinese corporations have taken on huge volumes of debt over the past five years, and the financial services industry is bracing for a mess of defaults.
   Many commodity markets that depend on Chinese purchases took quite a hit last week, Sharp said. Copper futures fell 4.5% to 3½-year lows.
   So far the dairy markets have proven impervious to concerns about the Chinese economy, and indeed, by all accounts Chinese dairy product imports remain strong. But every commodity market that depends on exports must be casting a wary eye toward China, Sharp concludes.
   One more factor affecting the world dairy market is the European Union ending its milk production quota system in just over a year from now. The March 14 DDR reported that, with the end in sight and milk prices at record highs, many of Europe’s dairy producers have already added cows and increased milk production.

Margin Protection is Not Complicated
   So says the University of Missouri’s Joe Horner in a column in a recent issue of Ag Weekly. When milk producers first hear of the Margin Protection Program for dairy producers, they become confused about the new Farm Bill safety net. “It is new and different, but it really is not complicated,” says Joe Horner, University of Missouri Extension economist. Margin insurance, however, takes more planning than the Milk Income Loss Contract (MILC) in past Farm Bills.
   The USDA program is voluntary, so producers do not have to enroll. But the insurance is subsidized and some is free. The program allows those enrolled to select a level of margin, or income compared with feed costs. Margins are calculated at the national level, not at farm level. For decision-making, however, Horner urges producers to know their dairy margin, milk income less feed costs. That margin helps decide which level to insure. The national feed cost is based on prices of corn, soybean meal and alfalfa hay.
USDA will recalculate the margin every month. If the margin drops below the insured level for 2 months, the producer receives a check. Insurance pays when the margin is squeezed.
   The insurance rates are fixed for the life of the Farm Bill. Premiums are higher for producers selling more than 4 million pounds of milk a year. There is a free lower level of insurance. The 4 million pounds level equals about 200 dairy cows. Most Missouri farms are under that level, Horner says.
   The big decision will be how much margin to insure, Horner says. This takes homework. A producer can insure from 25 percent up to 95 percent of milk sold.
Sign-up will be at local USDA Farm Service Agency (FSA) offices. FSA charges a $100 annual administrative fee, even for the free insurance.
   Horner cautions that FSA is not ready to take enrollments. The agency is still writing regulations. Meanwhile, MILC continues until the margin protection program arrives, or Sept. 1 at latest.
   University of Missouri Extension has a guide, How to Compute Your Cost of Producing Milk. It can be downloaded at extension.missouri.edu/p/G3651.
   In talks to producers, Horner adds a disclaimer: He is interpreting what he reads in the Farm Bill. “FSA is the final authority,” he says. “This is for education only.” Training is provided by the University of Missouri College of Agriculture, Food and Natural Resources. Log on to:

Got South Dakota?
   KELO Television in Sioux Falls reports that South Dakota is wooing dairy producers, particularly California dairy producers. Details are posted on the station’s website and reports that the demand for dairy is on the rise in South Dakota and that's prompting Governor Dennis Daugaard to come up with his own catchy slogan. 
   Daugaard has taken to Twitter with the hashtag #getsomemilk2014 in an attempt to get the word out to dairy producers that South Dakota is the place to be for their business.
   Happy cows may come from California but their owners may be headed for South Dakota. Daugaard has been recruiting producers from the "Golden State" with promises of no state income or corporate tax.
   Here's what he had to say at a recent convention out west courtesy the  DairyHerdNetwork: "I was just talking to a California producer who has a site here in California we're going to be visiting tomorrow, as well as one in South Dakota. He said, I don't pay any income tax in South Dakota, I like that well, but I don't pay any income tax either because I have no net income here," Daugaard said.
   Joking aside, a lot of the California dairy producer's struggle has to do with the cost of feed. There's plenty of corn and beans in the midwest while farms in California sometimes focus on other crops.
   "The guys out west are feeding the same corn and beans we are, but they have 1,500 miles of freight on it. I think part of the evolution of the industry is going to see more cows where their feed is," Randy Gross said.
   Read more at http://www.keloland.com/newsdetail.cfm/sd-hoping-to-milk-dairy-business/?id=161380.

Discount Registration
   DairyBusiness/HolsteinWorld readers can take advantage of a discounted Dairy Calf & Heifer Conference registration by using the code DB10714 online or at on-site registration. The event takes place April 1-3 in Green Bay, WI. Register online by Tuesday, March 18, and receive $25 off your conference registration:
   Read more: http://dairybusiness.com/dairyline.php#ixzz2w8EUL2fu

Mielke Market Daily
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update associate editor Lee Mielke)
   Call it the “Luck of the Irish” or just plain old fashion supply and demand at work, but CME cash block cheese again set a record high this morning on 1 unfilled bid, which priced the 40lb. Cheddar at an unbelievable $2.40/lb., up 3.75¢ on the day, with no seller in sight. The barrels, after two sessions of decline last week, jumped 4.25¢ this morning on 5 trades. The 1st carload sold at $2.26/lb. and 2 cars later the price had slipped to $2.2450/lb., but the 4th sale brought it back up to $2.2950/lb., and the last sale was at $2.3050/lb. That put the spread at 9.5¢, well above the normal 3-5¢ so either the barrels will climb some more or the blocks will fall. Place your bets!
   FC Stone’s Chris Hildebrand wrote in this morning’s Insider Opening Bell that cheese may continue to rise but he also posed the question; "Who will pay that kind of price for cheese? It could be a worry."       
   Class III futures responded with double-digit gains through Jan. 2015. The April, May, & June contracts were up 75¢.
   Butter was up 2¢ this morning on a trade, and hit $1.90/lb., after slipping 0.5¢ Friday.
   As the DMN story above says, butter supplies are available and inventories are not building. Hildebrand agrees and says "The market has been stable coming into Easter demand."
   Cash Grade A powder was unchanged for the 7th consecutive session today, holding at $2.04/lb., with no activity.
Today’s Market Closing Prices:
Butter: Up 2¢, to $1.90/lb.
Cheddar blocks: Up 3.75¢, to $2.40/lb.
Cheddar barrels: Up 4.25¢, to $2.3050/lb.
Grade A nonfat dry milk: Unchanged, at $2.04/lb.
Class III milk: Mar. $23.49, +20¢; Apr. $23.12, +75¢; May $21.51, +75¢; & Jun. $21.01,+75¢. Based on today’s CME settlements, the Second Quarter 2014 average now stands at $21.88, +75¢ from Friday. The 2nd half average is now at $19.68, +35¢ from Friday.
Looking ahead:
   The biweekly Global Dairy Trade Auction takes place tomorrow. A lot of eyes will be there to see if the last session’s 4% decline is reversed. The Agriculture Department issues its preliminary February Milk Production report Wednesday afternoon, and the April Federal order Class I base milk price is announced. The monthly Livestock Slaughter report is issued Thursday and the February Cold Storage report is out Friday afternoon.
Tuesday on DairyLine:
   More on the food labeling war with the European Union from USDEC's Tom
   Keeping up with on-farm technology with BouMatic's Denise Behnke