DairyBusiness Update: March 25, 2014

How Long Will the High Prices Last?
   That’s what everyone is wondering but no one has the definitive answer. Robert Chesler, vice president of INTL FCStone's Foods Division, Chicago, wrote in this morning’s Insider Opening Bell: "There's competition for milk from the butter/cream cheese side of the market with last minute orders for the Easter and Passover season. Adverse weather has constrained production in a number of Midwest states, but the worst should be behind us, so production there should improve." He adds that “An early flush, which could be of an extended duration, is occurring in the West and milk is moving from California to other states.”

Current Cheese Prices May Be “Overcooked” 
The current record cheese price levels are probably a little misleading, according to FC Stone dairy economist Bill Brooks. Dairy farmers have never seen prices like this before, with CME 40 lb. block cheese trading at $2.4325 and 500 lb. barrels at $2.3775.
   “We are in a tight market,” Brooks warned on Tuesday’s DairyLine Radio program.  “We haven’t seen a trade for block cheese since February 20th.”
   Prices continue to set records because of the world market, weather, feed prices and featured dairy products in store shelves from the last football season and now March madness. But those are going to go away quickly, according to Brooks.
   “That’s going to negatively impact our demand and hopefully not make the down-turn potentially worse than what we might anticipate,” he said. Brooks has that feeling that the markets are a bit “overcooked.” 
   Even though inventory levels are below a year ago, we’re only three days below the amount of available supply we have in cold storage inventories. However prices are 60 to 70 cents above a year ago. U.S. prices are also 10-30 cents above international prices.
   “We’re going to lose that competitive factor that helped us ship a lot of product offshore,” Brooks said. “But the market is always right; we just have to figure out the timing of when it is going to go in the other direction.”
   Some producers have put in some risk management positions, like forward contracting with their milk buyer and some are also locking in feed prices. Both have started to work their way higher.
   “We are starting to see dairy producers look at that,” he said. “They are being pretty judicious with those positions because they do see this market is continuing to go up.”
   It’s more difficult to hit the exact high of the market when trying to sell milk in futures, options or a forward contract. So producers don’t want to miss it by too much and leave money on the table.
   Weather, feed costs and feed quality are reasons to layer in protection on margins, according to Brooks. Producers are also looking at a new risk management tool from the new farm bill, and are learning how to implement margin insurance that will protect them against the massive price fluctuations that we seem to have in agriculture.

High Cost Cheese Hurting Pizza Makers
   Alyssa Sowerwine writes in Friday’s Cheese Market News that record high cheese prices at the Chicago Mercantile Exchange (CME) are putting the squeeze on an industry that counts cheese as one of its star ingredients — pizza makers.
   Cheese is simultaneously one of the most important ingredients for pizza makers and one of the most expensive, and the price can fluctuate quite a bit. Recently, CME barrel and block cheese prices have reached record highs, this week edging up as high as $2.3050 per pound for barrels and $2.4275 for blocks.
   “Obviously, when you’re seeing record high prices it adds significant costs to anyone who uses cheese, such as those in the retail and foodservice sectors,” says Eric Meyer, president of HighGround Dairy, Chicago. “Mozzarella buyers often are impacted the quickest by these price changes because they have to buy fresh product.”
   Meyer notes that as prices rise, some pizza makers will absorb additional costs in the near term, but as high prices are sustained, “folks will have no choice but to make changes in their menus, either by raising their prices or using less cheese.”
   Meyer notes that the volatility in the cheese market can be especially challenging for smaller pizza makers.
   “When we go from where we were 6-7 months ago at $1.70 and go up to $2.40, it’s difficult for pizza makers, especially smaller ones, to deal with these price margins,” he says. Read more at http://cheesemarketnews.com/stories.html.

Final WIC Rule Excludes Reduced-Fat Milk
   The International Dairy Foods Association (IDFA)  has conducted further analysis of the final changes to the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) announced last month by the U.S. Department of Agriculture. Reduced-fat or 2 percent milk is now excluded from the program unless the recipient can qualify for a specific health exemption.
   USDA’s interim final rule from 2007 allowed children older than 24 months and women to choose either 2 percent reduced-fat milk or 1 percent low-fat or nonfat milks. With this change, only low-fat or nonfat milk will be the standard issue. Whole milk will still be allowed for infants under 2 years of age (12-23 months).
   “This change is significant for IDFA members because an overwhelming majority of program participants have been choosing 2 percent milk,” said Cary Frye, IDFA vice president of regulatory and scientific affairs. “Now that more women and children will switch to low-fat or nonfat milk, providing a healthier choice for them, dairy companies will have the opportunity to increase production and likely sales in those categories.”
   This rule is effective May 5, 2014. These changes to the final rule were implemented to align WIC participants’ food choices more closely with the 2010 Dietary Guidelines for Americans, which recommend low-fat and nonfat milk.
   For more details and a chart of USDA’s WIC Food Package, read IDFA Summary of WIC Final Rule.

Raw Milk Sales Proposal Gets Delayed
   WBAL Radio reports that a proposal to legalize raw milk sales in Maryland has been pushed back another year. The bill's chief sponsor hopes a report from Johns Hopkins University will give it the necessary push in 2015.
   Del. James Hubbard withdrew his bill on Monday. He said it was clear the House Health and Government Operations Committee wouldn't vote on the issue during these last two weeks of the legislative session.
   But in December, the Bloomberg School of Public Health at Johns Hopkins will give a thorough report on the scientific literature surrounding raw milk. Hubbard, a Democrat from Prince George's County, said this will give better perspective on whether it poses a public health hazard.
   Twelve states allow raw milk sales in stores, according to the National Conference of State Legislatures. Another 18, including Virginia, allow sales through venues like farmers markets and herd-share programs,
   If it truly posed serious risks, it probably wouldn't be legal throughout so much of the country, Hubbard said.
   The bill Hubbard filed this year would have let consumers buy shares of cow herds and receive the unpasteurized milk.
   Read more at http://www.wbal.com/article/106266/3/committee-rejects-plan-allowing-raw-milk-sales.

Capitalist/Free Enterprise Type Competition at Play Over China
   Australia faces strong competition from food producers in Europe, the Americas and New Zealand as the world’s main agricultural nations gear up for a bigger slice of the China consumption boom, according to Geoff Hiscock of The Australian Business.
   China is expected to spend about $US1.75 trillion on food in 2050, according to “What China Wants,” a newly released study by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), or about double the $US870 billion it spent in 2009.
   While China has a huge domestic supply capacity in basic foodstuffs such as grains, poultry, pork and vegetables, the growing demand from millions of urbanized middle-class Chinese consumers for higher quality meat and dairy products is creating a massive export opportunity for producers around the world.
   Australia has advantages such as a “clean and green” reputation, strong supply capabilities in meat, dairy, grains and wine, the right time zone and relative proximity to the China’s big east coast consumer markets, but a high dollar, high production costs and a lack of scale renders it unable to meet Chinese demand in some high-growth categories such as soybeans.
   At the same time, rival suppliers such as the United States, Brazil, the Netherlands, Germany, France, Denmark and New Zealand are actively working to meet demand from China for both low-value and high-value foodstuffs.
   New Zealand, which signed a free-trade agreement with China in 2008, has just set a target of $NZ30 billion in China bilateral trade by 2020, up from the 2015 target of $NZ20 billion. While that looks small compared to Australia’s $125 billion two-way trade figure with China, much of New Zealand’s exports are foodstuffs, with dairy the single biggest item. In contrast, about 85 per cent of Australia’s $80 billion of China exports are resources such as iron ore, coal, gold, oil and gas. Agricultural exports are about $7 billion, of which about $2 billion falls into the food category, led by barley and wheat.
   Read the complete article at http://www.theaustralian.com.au/business/in-depth/competition-heats-up-for-china-food-boom/story-fni2wt8c-1226861005614

CWT Removes Some More
   Cooperatives Working Together (CWT) accepted 15 requests for export assistance today from Dairy Farmers of America, Foremost Farms USA, Maryland & Virginia Milk Producers Cooperative Association, Michigan Milk Producers Association and Tillamook County Creamery Association to sell 2.094 million pounds of Cheddar cheese, 1.185 million pounds of 82% butter and 308,647 pounds of whole milk powder to customers in Africa, Asia, Central America, the Middle East and North Africa. The product will be delivered through August and raised CWT’s 2014 exports to 29.299 million pounds of cheese, 15.495 million pounds of butter, and 2.881 million pounds of whole milk powder to 21 countries on five continents. These sales are the equivalent of 619.5 million pounds of milk on a milkfat basis, according to CWT.

Butter Producers to Meet in Chicago
   The American Dairy Products Institute and American Butter Institute will hold its Annual Conference April 27 - 29, 2014, at the Hyatt Regency in Chicago, Illinois. This year’s theme is “Where the Dairy Industry Does Business.” Over 1,000 senior level executives from manufacturers, marketers, suppliers, distributors and brokers of manufactured dairy products, as well as industry analysts, journalists and key government officials, will attend. Complete details including the agenda and online registration can be viewed at www.adpi.org.

Mielke Market Daily
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update associate editor Lee Mielke)
   Cash block cheese was unchanged this morning in Chicago, holding at yesterday’s new record high of $2.4325/lb.. There was no activity but there lays a big magnet to start attracting cheese to the CME, IF someone body had cheese to sell. Cheddar barrel, on the other hand, dropped 1.75¢ this morning, on an uncovered offer, after jumping 6.75¢ yesterday. The barrels rolled to $2.36/lb., following yesterday’s new record high of $2.3775/lb. The spread is now at 7.25¢, compared to the normal 3-5¢.
   Class III futures retreated, with April, May, & June losing 26¢, 22¢, & 26¢ respectively.
   Butter, on a trade, inched up another 0.5¢, after gaining 2.5¢ yesterday, and is now trading at $1.95/lb. A bid at $1.93/lb. was left on the board.
   FC Stone’s Robert Chesler says fat is the tightest dairy market globally but the U.S. is “no longer export competitive." “Not only have prices elsewhere weakened as U.S. prices continued to move higher,” he said, “But the U.S. dollar has also strengthened.”    
   A trade took the Grade A nonfat dry milk down another 1.5¢, after an offer lowered it 3.5¢ yesterday, and is now trading at an even $2.00/lb.
   Chesler called the powder market “top-heavy,” following yesterday’s drop. “A lot of milk in California means skim and nonfat factories are full, Chesler said. “The question now is how long will the market flat line before moving lower. An issue in the nonfat dry milk market is how to hedge inventories that are being put away above $2/lb. if the National Dairy Products Sales Report prices lag the spot market. The over-the-counter market has more flexibility right now," says Chesler.

Today’s Market Closing Prices:
Butter: Up 0.5¢, to $1.95/lb.
Cheddar blocks: Unchanged, at $2.4325/lb.
Cheddar barrels: Down 1.75¢, to $2.36/lb.
Grade A nonfat dry milk: Down 1.5¢, to $2.00/lb.
Class III milk: Mar. $23.28, Unchanged; Apr. $23.83, -26¢; May $21.87, -22¢; & Jun. $20.59, -26¢. Based on today’s CME settlements, the Second Quarter 2014 average now stands at $22.10, -24¢ from Monday. The 2nd half average is now at $19.48, -10¢ from Monday.
Looking ahead:
   The U.S. Dairy Situation at a Glance report is issued by USDA tomorrow. It will include the latest dairy product commercial disappearance data and the latest Ag Prices report is out Friday and will include the latest milk feed price ratio.
Wednesday on DairyLine:
   Pro-Ag’s Arden Tewksbury tells us why the dairy provisions in the new farm bill is not
   Pam Reugg, Extension Milk Quality Specialist at the University of Wisconsin updates
   us in our second half