DairyBusiness Update: April 3, 2014

February Dairy Products Report: More Cheese, Less Butter
 February 2014 U.S. milk production was up 1.4% compared to a year ago, according to USDA’s preliminary estimate, and that translated into small increases in cheese production for the month, according to USDA’s monthly Dairy Products report issued this afternoon. February 2014 dairy product output, compared to February 2013 and year-to-date (Y-T-D) estimates included:
• Total cheese: 850.6 million lbs., down 0.6%; Y-T-D 1.8 billion lbs., up 0.7%. 
• Total Italian cheese: 374.1 million lbs., up 3.7%; Y-T-D 794.4 million lbs., up 4.4%.
• Mozzarella: 299.8 million lbs., up 7.5%; Y-T-D 632.2 million lbs., up 7.1%.
• American-type: 341.3 million lbs., down 1.5%; Y-T-D 721.7 million lbs., down 0.2%. 
• Cheddar: 249.3 million lbs., down 0.8%; Y-T-D 526.3 million lbs., down 1.1%.
• Butter: 165.8 million lbs., down 4.6%; Y-T-D 348.2 million lbs., down 3.8%.
• Dry milk powders–Nonfat dry milk, human, 140.9 million lbs., up 2.3%, Y-T-D 279.8 million lbs., down 0.3%; and skim milk powders, 34.8 million lbs., down 19.4%, Y-T-D 93.6 million lbs., up 2.7%. 
• Dry whey (total): 65.5 million lbs., down 15.1%; Y-T-D 135.5 million lbs., down 19.2%.
• Yogurt: 392.8 million lbs., up 9.3%; Y-T-D 788.1 million lbs., up 4.5%.

Butter Output Mixed/Exporters Finding Increased Competition
   Northeast butter production is mixed, according to USDA’s Dairy Market News (DMN), however, overall production rates are up with increased milk supplies going into balancing plants. Some churns are idle as cream supplies are being cleared to Class II production channels.  Most butter makers have finalized customers' spring holiday orders, as contacts in the region report steady to strong domestic sales. The market tone is firm.
   Many Midwest butter manufacturers are wrapping up the last of the Easter/Passover retail orders. The market tone is steady. Snug cream supplies and increased cream prices resulted in a few butter churn operators electing to sell some cream supplies, reducing production levels. International interest is ongoing as manufacturers fill export orders. Domestic demand is moderate to very good with anticipation of a slight back off in sales after current holiday orders are filled. Butter makers look to replenish light inventories in the coming weeks.
   Western butter prices are uneven this week. Despite unusually high prices for this time of year, demand continues to be good in both domestic and export markets. Retail demand is good for print orders into grocery and club stores. Export demand is finding increased price competition from other exporters. 

Cheese Demand Remains Despite High Prices
   With improved milk supplies on hand, some Northeast cheese plants are running at full production, according to DMN. Domestic demand is strong with cheese makers reporting new product as already sold. Inventories are light to adequate. The market undertone is steady.
   Midwest cheese production of multi-plant commercial cheese manufacturers is steady to higher this week. Regional milk production increases leaves adequate milk for plant needs. Orders early in the week are described as fairly strong, or up slightly for most operations. Reports are noted for weakening demand for process cheese. Most manufacturers are not sure what continued weaker prices might mean for orders in the near term. Little consensus was offered as to anticipated price movement the remainder of this week, which so far has not led to any noticeable change in buyer ordering overall. More specialized cheese manufacturers have noted some recent buyer resistance at higher prices and now they are waiting to find out whether recent price weakness will positively affect demand.
   Western wholesale cheese prices are higher this week for both barrel and block derived prices. Swiss prices are steady. The current spread between blocks and barrels is causing some uneasiness as buyers try to determine market direction.  Buyer demand from the retail side is good, but high prices are making decisions more difficult for buyers into ageing programs. Export demand continues to be good.

Foreign Cheese Prices Unchanged: 1st Time in 6 Weeks
   Dairy Market News reports that prices for domestic foreign type cheeses were unchanged this week, the first time in 6 weeks that prices did not increase. Prices for Swiss cuts and imported cheeses were also unchanged. Cheese prices in the EU have declined as export declines to Russia have increased EU supplies and pressured prices lower.  The full effects of the uncertainty surrounding the Russian situation and the impact on the import cheese market in the U.S. have not yet been determined.  

How Are Pizza Companies Dealing With High Cheese Prices?
   Holly Freeland writes on PizzaMarketplace.com that, “While it may go largely unnoticed by American pizza consumers, the price of cheese, the costliest ingredient in pizza, has been rapidly rising throughout the past year. On the Chicago Mercantile, prices averaged $1.57 in March 2012, and they were $2.41 last week.
   Larger, national chains may be more adept to withstand the upswing in pricing, while smaller concepts are having to weather a bigger storm.
   Executives from both Domino's and Papa John's touched on the record-high cheese prices during their most recent earnings calls and said the trend could potentially help them take away more market share from smaller chains and independents.
   "Whenever you look at commodity pressures, you've got that tendency to raise prices," Domino's CFO Michael Lawton said during his company's Q4 call. "It's easier to not raise prices and continue to do what's right for the customer to keep your prices at the price points that they're looking for as long as possible when you're running good volume through your stores. Each of the last four quarters at least, we've had good solid order count growth and I would hope that puts us in a stronger position to withstand short-term commodity bumps than somebody who is being stretched out on lesser volume."
   Papa John's COO Tony Thompson added that there is "no question" larger chains are gaining market share, in large part because of pricing efficiency. "From a pricing standpoint, you're still seeing some pretty competitive aggressive price points from both sides and that's a competitive environment we have to be sensitive to. We certainly pay attention to what our competitors are doing, but we manage out of our playbook," he said. 
   Price fluctuations in commodities are part of the game in the industry that neither side can ignore. What's different is how both the larger chains and the smaller ones adapt to deal with swings in the prices. The smaller chains and concepts may not have the same capabilities when it comes to absorbing pricing hits, but most handle the perceived disadvantage by leveraging other attributes.
   Read more at http://www.pizzamarketplace.com/article/230355/How-small-pizza-chains-are-competing-through-high-cheese-prices.

Dairy Producers Coping Just Fine With the Higher Cheese Prices
   Penn State’s measure of income over feed costs rose by 1.9% in March, according to Jim Dunn, Professor of Agricultural Economics, and he graphs how “unusual” these higher values are compared to recent years. This is an increase of 22¢/cow/day, writes Dunn.    
   The March value of $12.06/cow/day is once again the highest value since we began calculating this measure in January 2000. Although both the milk price and feed cost rose in March, the net effect was positive. Feed prices rose by only 3.3%, with small gains in all three ingredients in the constant ration we use to calculate IOFC. The cost of feeding a cow rose by 16¢/day to $5.16. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day.
   The milk margin is the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid. Like income over feed cost, this measure shows that the March PA milk margin was 1.9% higher than in February.
   To read more and view Dunn’s graphs, log on to: http://www.personal.psu.edu/faculty/j/w/jwd6/DairyOutlook%20apr%2014.pdf.

More Milk Please!
   That gallon of milk you consider a staple in your refrigerator is missing in America's food banks. According to Feeding America, the nation's largest domestic hunger-relief organization, milk is one of the items most requested by food bank clients, yet there is a nationwide shortage because it is rarely donated. That will soon change, thanks to The Great American Milk Drive, the first-ever national program to help deliver highly desired and nutrient-rich gallons of milk to hungry families who need it most.
   Hunger impacts 1 in 6 Americans, including 12.5 million families who do not have access to adequate nourishment to help them reach their full potential. Hunger has no boundaries and is a problem that exists in urban, suburban and rural communities. In fact, the Food Bank of South Central Michigan serves 102,600 people each year in their eight county service area.
   Map the Meal Gap shows how hunger impacts every county in the country. With its network of more than 200 food banks and 61,000 food pantries, soup kitchens and emergency shelters throughout the country, Feeding America helps provide food to families in need - including many in south central Michigan.
   It's been a challenge for Feeding America to meet the demand for milk due to the lack of donations - canned goods and other non-perishable items are more likely to be donated. Now, it's going to be easier for all residents to lend a hand and contribute nutritious milk to food insecure families.
   With a simple click of a mouse (www.milklife.com/give) or text message (text "Milk" to 27722), it will now be possible to buy much-needed milk and donate it for as little as $5.00 to a family who does not have regular access to milk. By entering your zip code, you can ensure that the milk is delivered from the farm to a local Feeding America food bank in your very own community.
   The Great American Milk Drive is made possible by the nation's dairy farmers and milk companies. The goal of the campaign is to deliver two million gallons of milk to food banks across the country, and Michigan residents can help meet that goal.

Mielke Market Daily
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update associate editor Lee Mielke)
   Cash cheese traders were anticipating this afternoon’s February Dairy Products report but they may have got a late “April Fool’s.” The blocks jumped 3.75¢, on an unfilled bid, and climbed back to $2.4225/lb. while the barrels dropped another 2¢, to $2.23/lb., widening the spread to an unsustainable 19.25¢. The 1st 2 sales were at $2.26/lb. but the 3rd was at $2.24/lb. A bid at $2.20/lb. was ignored but an offer at $2.23/lb. took the price lower on the day.
   Class III futures followed the climb, with April up 20¢ and May and June both up 34¢.
   Butter lost another 1.5¢, after dropping 2.5¢ yesterday and gaining 1¢ on Tuesday, and is now at $1.97/lb. Two cars were sold, 1 at $1.98/lb. and 1 at $1.97/lb. Two bids at $1.95/lb. went unfilled and an offer at $2/lb. got no response.
   Cash Grade A nonfat dry milk was unchanged, holding at $1.9975/lb. There was no activity again today.

Today’s Market Closing Prices:
Butter: Down 1.5¢, to $1.97/lb.
Cheddar blocks: Up 3.75¢, to $2.4225/lb.
Cheddar barrels: Down 2¢, to $2.23/lb.
Grade A nonfat dry milk: Unchanged, at $1.9975/lb.
Class III milk: April $24.23, +20¢; May $22.70, +34¢; & Jun. $21.07, +34¢. Based on today’s CME settlements, the Second Quarter 2014 average now stands at $22.67, +30¢ from Wednesday. The 2nd half average is now at $19.63, +15¢ from Wednesday.
Looking ahead:
   There are no additional reports this week which we regularly monitor from USDA. The Agriculture Department issues its latest Crop Production report on Wednesday, April 9, along with its monthly World Agricultural Supply and Demand Estimates report, which will include the Department’s latest milk production estimate and milk price forecasts. The California Department of Food and Agriculture announces the state’s May Class I milk prices on Thursday, April 10.
Friday on DairyLine:
   FC Stone dairy broker, Dave Kurzawski talks about the significance of the Global    
         Dairy Trade auction (GDT) and its recent plunge
   Dr. Mike Hutjens discusses the new dairy bill and how pricing will impact dairy
          farmers in his weekly “Feed Facts” segment.


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