Lee Mielke Market Update December 15

Lee Mielke

Lee MielkeLee Mielke is a veteran dairy journalist and broadcaster, currently carried in a dozen Ag newspapers nationally. This column is prepared especially for the readers of DairyBusiness. Based in Lynden, Wash., he can be reached by email at [email protected] or by phone 360.201.4033.

The Agriculture Department lowered its 2017 and 2018 milk production forecasts in its latest World Agricultural Supply and Demand Estimates report issued Tuesday, due to slower growth in milk per cow. That slower growth is expected to carry into 2018 and “combined with an expected slower rate of growth in cow numbers,” the 2018 milk production forecast was also lowered.

2017 production and marketings were projected at a record 215.7 and 214.7 billion pounds respectively, down 100 million pounds from last month. If realized, 2017 production would still be up 3.3 billion pounds or 1.6 percent from 2016.

2018 production and marketings were projected at 219.3 and 218.3 billion pounds respectively, down 400 million pounds from last month. If realized, 2018 production would be up 3.6 billion pounds or 1.7 percent from 2017.

Price forecasts for cheese, butter, and nonfat dry milk were lowered for 2017 “on current price weakness and slower demand.” The 2017 whey price forecast was unchanged at the midpoint. All dairy product price forecasts were reduced for 2018 “on pressure from large stocks and slower expected demand.”

The 2017 Class III milk price forecast was unchanged from last month, ranging $16.15-$16.25 per hundredweight (cwt.), up from $14.87 in 2016 and $15.80 in 2015. The 2018 average is projected at $15.30-$16.10, down 20-30 cents from last month’s estimate.

The Class IV milk price forecast was reduced a nickel from the previous month, with the 2017 average projected at $15.05-15.25, and compares to $13.77 in 2016 and $14.35 in 2015. The 2018 average is estimated at $13.90-$14.80, down 25-35 cents from last month’s projection.

Turning to the crop/feed side of the report, this month’s 2017/18 U.S. corn outlook is for increased corn used to produce ethanol and reduced ending stocks. Corn used to produce ethanol was raised 50 million bushels to 5.525 billion. Ending stocks are down 50 million bushels from last month. The projected season-average farm price was unchanged at a midpoint of $3.20 per bushel but the range was narrowed 5 cents on each end to $2.85 to $3.55 per bushel.

Total U.S. oilseed production for 2017/18 was projected at 132.2 million tons, up slightly due to a small increase in cottonseed. Soybean exports were reduced 25 million bushels to 2.225 million on stronger-than-expected competition from Argentina and Brazil during the first quarter of the marketing year. Soybean ending stocks for 2017/18 were projected at 445 million bushels, up 20 million from last month and still the highest since 2006/07.

“Following the December 5, 2017 affirmative determination by the U.S. International Trade Commission regarding countervailing duties on biodiesel imports from Argentina and Indonesia, soybean oil used for domestic production of methyl ester was raised 500 million pounds to 7.5 billion,” the report stated. “Reduced soybean oil exports and non-ester domestic use are offsetting, leaving projected ending stocks unchanged at 1.62 billion pounds. The U.S. season-average soybean price range for 2017/18 was narrowed to $8.60 to $10.00 per bushel. Soybean meal and soybean oil price ranges were unchanged at $295 to $335 per short ton and 32.5 to 36.5 cents per pound, respectively.”

“This month’s 2017/18 U.S. cotton forecasts include higher exports, slightly higher production, and lower ending stocks. Production was raised 63,000 bales as increases in the Southwest were largely offset by decreases in other regions. Domestic mill use was unchanged, but exports were raised 300,000 bales due to reduced production in other countries. Ending stocks are now projected at 5.8 million bales, 200,000 lower than forecast in November, but more than double the 2016/17 level. The forecast range for the marketing year average price received by producers was raised 3 cents at each end, to a midpoint of 66 cents.”

 

It was a record breaking week in the cash dairy markets. CME block Cheddar fell to $1.4450 on December 12, lowest price since March 29, 2017, but then rallied and closed that Friday at $1.53 per pound, up 5 1/2-cents on the week and reversed six weeks of decline, but 27 cents below a year ago. The barrels closed at $1.66, down a penny, 4 cents below a year ago, and 13 cents above the blocks after setting a record inverted spread of 22 1/2-cents on Tuesday. They also set a record single day volume of 36 cars sold on Monday December 11, the highest since daily trading started September 1, 1998 and eclipsed the previous high of 35 loads set June 18, 2010, according to FC Stone. A total of 97 cars were sold on the week at the CME and 7 of block.

Dairy Market News reports that milk remains readily available to Midwestern cheese plants, with spot loads ranging $1 to $4.50 under Class III. Some cheese producers warned that only heavily discounted milk offers will be considered for the remainder of 2017. Cheese production is moderately active and cheese sales are steady to slow. The large and inverted CME price gap has resulted in an “unsteady cheese market tone,” says DMN.

Western cheese output is ongoing as milk is also plentiful and more of it is moving to the vat. DMN says some processors are hesitant to take on additional loads of milk due to the current weakness of cheese prices and the ample supplies. Some report that block cheese purchases have decreased a little but barrel cheese sales are picking up but they are “not comprehending the reason behind buyers’ sudden interest in barrel cheese.” Other participants suggest that holiday orders are “steady to up and, as the U.S. competition with the EU for market share increases, more pressure is put on prices.”

The December 14 Daily Dairy Report (DDR) provided some interesting market data, reporting that the CME’s new electronic trading has resulted in soaring cheese volumes in the first six months of implementation. It states that “With just two weeks left in 2017, 2,246 loads of CME spot Cheddar cheese traded, compared to 1,055 loads for full-year 2016. In fact, this year’s CME spot trade has eclipsed trading volumes for every year back to 2011.”

“This year, barrels represented 75 percent of total trades,” according to the DDR. “Between 2011 and 2014, barrel cheese represented only 47 percent of the volume, a figure very similar to the proportion of barrels reported in the National Dairy Products Sales Report during that time. Barrel activity increased in 2015 and 2016 to 65 percent of total trades. But this year’s high mark for barrel trading was new territory, and it’s staggering that the quantity of barrels traded this year rivals the total volume traded from 2014 to 2016.”

Cash butter slipped to $2.19 per pound Monday, then reversed gears and slowly climbed to $2.26 Thursday, but saw a Friday close at $2.2450, up 2 1/2-cents on the week and 5 1/2-cents above a year ago when it jumped 12 1/2-cents. Forty cars traded hands on the week at the CME.

Central region butter producers report that orders are back in line with expectations following a slow start to the month, according to DMN, while some report that buyers’ interest levels are ahead of expectations following the holiday rush. Cream remains abundant for churning but the butter market tone remains resilient. Contacts suggest that “the ebbs and flows of CME prices have benefitted buyers and sellers and the overall market tone is somewhat bullish.”

 

Western butter makers are working to fill remaining holiday orders and report that demand is following typical seasonal patterns. Manufacturers say “there are currently no big surprises in the butter market.” Inventories have been drawn down, but processors are finding themselves in a “transition period.” Cream is becoming less expensive and readily available. Contacts are watching global butter prices closely. “Prices have faltered in Europe and Oceania, narrowing or even reversing the gap between American and foreign butter prices. Some see this convergence of world butter prices as a hint that more imported butter or milk fat may be coming to the U.S. butter market.”

Cash Grade A nonfat dry milk also set a record, unfortunately a record low of 65 3/4-cents per pound, down 2 1/2-cents on the week and 36 1/4-cents below a year ago. Eleven cars found new homes on the week at the CME.

The California Department of Food and Agriculture announced its January 2018 Class I milk prices at $16.07 per cwt. for the north and $16.35 for the south. Both are down $1.88 from December 2017, $2.70 below January 2017, and the lowest Class I since July 2016. The January Federa; order Class I base price will be announced by the USDA on December 20.

Speaking of fluid milk, sales continue to lose ground. USDA’s latest data shows October packaged fluid sales totaled 4.1 billion pounds, down 1.0 percent from October 2016. Conventional product sales totaled 3.9 billion pounds, down 1.1 percent from a year ago; organic products, at 218 million pounds, were up 0.4 percent. Organic represented about 5.3 percent of total sales for the month.

Milk drinkers are returning to whole milk. Sales totaled 1.2 billion pounds, up 2.7 percent from a year ago, up 2.4 percent year to date, and made up 29.9 percent of total fluid sales in the month. Skim milk sales, at 342 million pounds, were down 10.9 percent from a year ago and down 12 percent, year to date.

Total packaged fluid milk sales in the nine month period totaled 39.8 billion pounds, down 2.1 percent from the same period a year ago.

Year-to-date sales of conventional products, at 37.7 billion pounds, were down 2.2 percent; organic products, at 2.1 billion pounds, were up 0.2 percent. Organic represented about 5.4 percent of total fluid milk sales so far in 2017.

Cooperatives Working Together (CWT) accepted 22 requests for export assistance the week of December 11 from Dairy Farmers of America, Foremost Farms, Northwest Dairy Association (Darigold) and Tillamook County Creamery Association. These cooperatives have contracts to sell 2.954 million pounds of Cheddar and Monterey Jack cheese, and 440,925 pounds of butter to customers in Asia, Central America, the Middle East, North Africa and Oceania. The product has been contracted for delivery through March 2018 and puts CWT’s 2017 export sales to 70.27 million pounds of American-type cheeses, and 5.25 million pounds of butter (82 percent milkfat) to 21 countries on five continents.

In other global news; New Zealand based Fonterra lowered their latest milk price forecast, just as USDA has reduced some of its projections. Jerry Dryer, editor and analyst of the Dairy and Food Market Analyst newsletter, said in the December 18 Dairy Radio Now interview that he has also lowered his forecasts, saying “the futures market keep catching up to my forecasts by slipping lower.”

The other side of the coin, he said, is that milk production is also backing off, citing USDA’s latest estimates, and he said that there are early warning signs in New Zealand of draught conditions, as weather has been quite dry in various parts of the country; up to a month without rain which is earlier than usual.

Dryer has lowered his predictions for global and U.S. milk output but he warned of “a period of low and declining prices near term however supply could tighten up enough to be very supportive of prices in the second half of next year.”

When asked how low he sees the Class III price going, he said it could get to $12.50 in the Second Quarter of 2018 but “supply tightening, turns it around.”

In politics; Congress is working to overhaul the federal tax code. The House and Senate have passed their respective tax reform bills and are now reconciling the two versions to send a final bill to President Trump.

National Milk says it is working with lawmakers to “shape the massive, complicated legislation so that it delivers a positive outcome for dairy farmers and their cooperatives,” according to NMPF’s “News for Dairy Coops.”

“NMPF is working with others in agriculture to preserve the benefits that farmers and cooperatives enjoy from the Domestic Production Activities Deduction (DPAD), also known as Section 199. NMPF has long supported this deduction, which cooperatives claim on the proceeds from sales of agricultural products like milk. Cooperatives pass through a majority of the benefit, nearly $2 billion nationwide, directly to their farmer owners, and reinvest the remaining proceeds in infrastructure improvements to help both the farmer and the cooperative.”

“While the House and Senate bills both repeal DPAD, the Senate legislation allows cooperative members to claim a new 23-percent deduction on their taxable income for qualified cooperative dividends, which refers to patronage dividends, per-unit retain allocations, qualified written notices of allocations, and similar amounts. Cooperatives could also claim the 23-percent deduction on taxable income, but it would be limited to 50 percent of their wages. NMPF is attempting to improve these provisions to ensure that the final tax reform legislation continues to recognize the unique nature of how cooperatives are taxed,” NMPF says.

Meanwhile; Arden Tewksbury, Manager of the Progressive Agriculture Organization (Pro-Ag), testified at a milk hearing conducted by the Pennsylvania Milk Marketing Board on December 6.

He charged that the existing Pennsylvania Class I premium must remain at $1.60 per cwt. (hundredweight). “Economic conditions that exist on our average dairy farm is making it nearly impossible to stay on the farm,” he said, and citing data from USDA’s Economic Research Service, pointed out that the average dairy farmer is producing milk at nearly $4.50 per cwt. below their cost of production.

Tewksbury said “It appears whenever there are problems within the dairy industry, that dairy farmers are the first ones to suffer. Furthermore, the dairy farmers have no method available to them to correct their pricing inequities.”