DairyBusiness Update: August 8, 2014

California September Class I Milk Prices Up 11 Cents
The California Department of Food and Agriculture announced its September Class I milk prices this morning at $25.39 per hundredweight for the north and $25.66 per hundredweight for the south. Both are up 11 cents from August and $5.11and $5.10 respectively above September 2013.

   The north Class I average now stands at $24.78 for the year, up from $19.91 at this time a year ago and $17.99 in 2012. The southern average, at $25.05, is up from $20.18 a year ago and $18.26 in 2012. The Federal order Class I base price is announced by USDA on August 20.

May Fluid Milk Sales Down 3.5%
May 2014 packaged fluid milk sales totaled 4.2 billion lbs., down 3.5% from May 2013. (Sales were not adjusted for calendar considerations as in previous monthly reports).
May sales of conventional products, at 3.99 billion lbs., were down 4.1% from a year ago; organic products, at 211 million lbs., were up 8.1% Organic represented about 5.3% of total sales for the month.
January-May 2014 total packaged fluid milk sales, at 21.24 billion lbs., were down 2.5% from the same period a year earlier. Year-to-date sales of conventional products, at 20.2 billion lbs., were down 3.2%; organic products, at 1.04 billion lbs., were up 12.4%. Organic represented about 5.1% of total sales.
   The figures represent consumption of fluid milk products in Federal milk order marketing areas and California, which account for approximately 92% of total fluid milk sales in the U.S.

Source: Dairy Market News

Dairy Products Report Revision is NOT Bearish
   The additional cheese in USDA’s revised June Dairy Products report this week did impact dairy product commercial disappearance data generated by Jerry Dryer, Editor of the Dairy and Food Market Analyst, but it not necessarily a negative factor. He talked about it on Friday’s DairyLine.
   A little over 37 million pounds of cheese had to be factored in, in a rare correction, which resulted in USDA republishing its report on Monday. The data was inaccurately reported to USDA, Dryer pointed out, and he praised the Agriculture Department for its prompt revision.
   Given the original report, Dryer reported that commercial disappearance of American type cheese was virtually unchanged from a year ago. The revision resulted in commercial disappearance being up 2.2 percent during the most recent three months, in other words, Second Quarter of this year, and “a nice bump,” he said.
   Other cheese disappearance was up 3.1 percent in the Second Quarter, “another strong number,” according to Dryer, butter disappearance was up almost 15 percent and skim milk powder/nonfat dry milk was up 5.3 percent, “so good solid commercial disappearance across the board during the Second Quarter of this year.”
   Dryer does not see the added cheese as a bearish signal. “The cheese was produced and it was consumed,” Dryer argued. “The inventory numbers at the end of June didn’t change. They didn’t go up because cheese production went up, they actually in general went down, signaling to us stronger consumption.”
   I asked him about this week’s continued drop in the Global Dairy Trade weighted average and the uncompetitiveness of U.S. dairy product prices on the world market.
   “Uncompetitive?” Dryer responded. “Cheese exports in June were up 30 percent versus a year ago, I think we’re still competitive in the cheese market for sure and nonfat dry milk shipments were up 25% versus a year ago.” “U.S. prices are higher than anyone else’s,” he concluded, “But we also have the product to deliver and they don’t necessarily have it to deliver from other locations.”

Do Futures Forecast the Future?
   That is the title to one of the recent FarmDoc Daily postings, authored by Dr. Carl Zulauf, Nick Rettig, and Matt Roberts of the Department of Agricultural, Environmental and Development Economics at Ohio State University. They write: A common presumption is that futures prices can predict future price, specifically the price during the last or delivery month of trading on a futures contract. This presumption has potential importance for both marketing and policy. Many crop insurance contracts use futures prices to establish their pre-plant and harvest prices. In addition, it is common to hear that futures prices should be used to forecast prices when evaluating the farm program choices in the 2014 farm bill. This article calls into question the presumption that futures prices can predict future price. It also finds that cash price performs as well as futures price in forecasting future price. Because of the technical nature of the analysis, the article begins with its summary observations. Readers can then decide if they want to read the details of the analysis.
   A futures price provides an unbiased forecast of future price but forecast error is large. A futures price provides no better forecast of future price than using last crop year's cash price.
Implication 1: crops with no futures market have no disadvantage in predicting future price
Implication 2: using futures prices to help determine the farm program choice in the 2014 farm bill offers no advantage over using the 2014 crop year average price
Implication 3: lack of a futures market is not a reason for not offering crop insurance; last crop year's average cash price works just as well as a forecast Futures markets do provide one marketing advantage.  They allow a price to be established for a future time by selling a futures or cash forward contract.  But, this advantage is only acquired by selling the crop since price usually changes, often substantially.  In other words, this advantage is obtained by selling at a price you like not because the forecast will turn out to be correct.
   Futures markets do provide one advantage for crop insurance.  It allows earlier settlement of insurance claims. However, this advantage is limited since partial payments can be made on crop insurance contracts that use cash prices.
   While radical given the long history of using futures prices to determine crop insurance prices, this study begs the question if futures prices are in fact the best method for establishing the price of insurance contracts.
   Length of time over which corn and soybean futures contracts are traded has steadily increased over the last half century.  Prior to 1970, it was rare that corn and soybean futures contracts traded a year prior to delivery.  In contrast, on Friday, August 1, 2014, the December 2017 corn contract and July 2017 soybean contract traded.  The increasing length of trading has reinforced the presumption that futures markets forecast future price.
   This study examines the forecast performance of the November soybean and December corn futures contract 1 year prior to delivery.  The price of these so-called new crop futures contracts are averaged during their November/December delivery period and during the November/December one year prior to delivery. These average prices are then compared.  To illustrate, average price of the November 2006 soybean contract during November 2005 is compared with average price of the November 2006 soybean contract during its delivery month of November 2006. We also compare, for example, the average U.S. cash price during the 2005 crop year with the average U.S. cash price for the 2006 crop year. In other words, we examine the potential of last crop year's U.S. average price to forecast the current crop year's U.S. average price.
   The period of analysis is the 1975 through 2006 crop years. This was an extended period of what are called stationary prices. Stationary prices have no long term trend up or down and have stable price variation. Nonstationarity in prices can lead to an overstatement of price forecast performance.
   The U.S. corn and soybean markets have desirable attributes when testing forecast performance. The U.S. is a major producer of corn and soybeans and thus the markets are heavily traded. The U.S. also produces corn and soybeans in a limited and similar timeframe, which creates a more uniform market environment in which to examine price forecast performance.
   Read their findings at: http://farmdocdaily.illinois.edu/2014/08/do-futures-forecast-the-future.html.

New Website Takes Consumers to “Califarmia” 
    California’s more than 1500 dairy families are inviting consumers to take a virtual trip to the land of Milk and Sunny with a new website called “Califarmia,”  where the cows moo like music and there’s more sunshine than you can shake a stick at. The site from the California Milk Advisory Board (CMAB) introduces consumers to the number one dairy state and its farm families with compelling content, images and interactive graphics that provide an engaging look into modern dairy farming.
    Each section of the new website offers a chapter in the story of Real California Milk:
Videos introduce the farmers who raise the cows that produce the milk that nourishes families everywhere. California dairy family stories bring consumers to Califarmia, and provide a snapshot of real farmers doing their part to feed the world.
   Visually appealing graphics and facts that provide a lesson in “cowology,” allowing consumers to learn about the care, comfort and health of the California cows that make the milk and dairy products enjoyed around the world.
   Recipes featuring the diversity of the dairy products made in California, from milk and butter to cheese and more, are a prominent feature on the new site along with multiple ways consumers can share the recipes they like.
   Community is at the core of everything California dairy farmers do. Here you can find examples of the many ways – from taking care of the land to supporting access to healthy foods – dairy farm families are working to make their communities better for generations to come.
   “In today’s hyper-connected world, consumers are used to instant-access to information about just about everything, including the food they eat and where it comes from,” said CMAB Vice President of Advertising Michael Freeman. “Califarmia is designed to engage with consumers in an authentic way and let them connect with the cows, the land, the farmers and the food that comes from California dairy farms. We pair that with integrations into games like FarmVille and real-time interactions on social media where they can share and like and pin, to bring the story of California dairy to consumers where they are spending their time.”
   Once consumers visit Califarmia and get to know the California dairy families and cows that produce their milk, they are able to use Facebook, Twitter, Instagram and YouTube for constant updates. They also can engage with one another by sharing favorite recipes through Pinterest. Consumers can even download the Cali CowChat app allowing them to create their own custom cow-vatar to record and send messages to friends through Facebook.  Consumers can take a trip to Califarmia at RealCaliforniaMilk.com or like Real California Milk at Facebook.com/RealCaliforniaMilk.

Mielke Market Daily / Week’s End Review
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update Associate Editor Lee Mielke)
   Cheese traders kept the cash 40lb. block Cheddar at $2.10/lb. this morning, with no activity. The 500lb. Cheddar barrels stayed put as well, holding at $2.1225/lb. A bid at $2.11/lb. went unfilled.
   Cash cheese secured its position above $2/lb. this first week of August. The blocks closed today, up 10¢ on the week, 30.25¢ above a year ago, and the highest they have been since May 1, 2014. The barrels finished 12.25¢ above last week, 35.75¢ above a year ago, and 2.25¢ above the blocks. Twelve cars of block traded hands this week and six of barrel. The NDPSR-surveyed U.S. average block price hit $2.0109/lb., up 0.3¢, while the barrels averaged $2.0726/lb., up 1.2¢.
   Cash butter was unchanged for the fifth consecutive session at $2.40/lb., despite another 11 carloads exchanging hands today. The price dipped to $2.38/lb. but came right back up to last Friday’s close. A bid at $2.3825/lb. went nowhere nor did an offer at $2.41/lb.  
   Butter was in a holding pattern all week, despite a lot of product coming to Chicago and after plunging 19¢ last week. While unchanged this week, it’s an amazing $1.0025 above a year ago. Thirty seven cars traded hands this week. NDPSR butter averaged $2.5313/lb., up 11.8¢.
   It was another daily drop for cash Grade A nonfat dry milk, which gave up 2¢ this morning, dipping to $1.54/lb. One car was sold at $1.55/lb. but an offer took it even lower, to $1.54/lb.
   The powder took a big hit this week and the GDT didn’t help matters any. The spot is down 11¢ on the week and the lowest it has been since March 26, 2013. Seven cars were sold this week in the spot market. NDPSR powder averaged $1.8412/lb., up 0.4¢, and dry whey averaged 69.29¢/lb., up 0.4¢.

Today’s Market Closing Prices 
Butter: Unchanged, at $2.40/lb.
Cheddar blocks: Unchanged, at $2.10/lb.   
Cheddar barrels: Unchanged, at $2.1225/lb.
Grade A nonfat dry milk: Down 2¢, to $1.54/lb.  
Class III milk (prelim.): Aug. $21.77/cwt., +1¢; Sept. $21.54, -22¢, Oct. $20.65, -19¢; Nov. $19.70, -14¢; & Dec. $19.14, -8¢. Based on today’s CME settlements, the Fourth Quarter 2014 average now stands at $19.83, -14¢ from Thursday. The First Quarter 2015 average is now at $18.16, -1¢ from Thursday. The Second Quarter 2015 average today stands at $17.97, unchanged from Thursday.

Looking ahead:
   There’s not a lot in store next week for the markets to feed on. The Agriculture Department’s weekly Crop Progress report is out Monday afternoon and the monthly World Agricultural Supply and Demand Estimates report is out Tuesday, which will include the Department’s latest milk production estimates and milk price forecasts.

Monday on DairyLine:
   DMI’s Tom Gallagher tells us the benefits of biogas systems on U.S. Dairy Farms.
   Former USDA organic inspector Mischa Popoff tells us what’s wrong with the current
   organic labeling system.


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