Lee Mielke Market Update January 19

Lee 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.

Just as the fight goes on in Washington between the Administration and Congressional Democrats over DACA and border security, especailly the wall, the threat hung over the country for a so-called government “shut down.” We’re told that “essential services” will continue but next week’s December Milk Production, Cold Storage, and Slaughter reports may not fall into that category and may therefore be delayed.

Tuesday was the second Global Dairy Trade (GDT) auction of 2018 and it added hope to the January 2 event by showing a nice 4.9 percent gain in the weighted average of all products offered. That followed the 2.2 percent gain on January 2. The quantity sold however slipped to 51.4 million pounds, the lowest quantity since June 2017.

Butter led the gains, up 8.8 percent, following a 0.6 percent advance January 2. Skim milk powder was next, up 6.5 percent after rising 1.6 percent last time. Cheddar cheese was up 5.2 percent, after falling 2.1 percent. Whole milk powder followed, up 5.1 percent, after it was up 4.2 percent, and anhydrous milkfat was up 2.2 percent, after slipping 0.2 percent last time.

FC Stone equated the GDT 80 percent butterfat butter price to $2.1669 per pound U.S. CME butter closed Friday at $2.12. GDT Cheddar cheese equated to $1.5814 per pound U.S. and compares to Friday’s CME Cheddar blocks at $1.5650. GDT skim milk powder averaged 82.46 cents per pound and whole milk powder averaged $1.3651. CME Grade A nonfat dry milk price closed Friday at 70 3/4-cents per pound.

FC Stone adds that “The firming price action followed a Fonterra January 16 news release that said December milk receipts fell by 5.5 percent.”

 Meanwhile, the Agriculture Department lowered its 2017 and 2018 milk production forecasts in its latest World Agricultural Supply and Demand Estimates report. The 2017 estimate was reduced, based on the most recent data and the 2018 projection was reduced due to slower anticipated growth in the dairy cow herd combined with continued slow growth in milk per cow.

2017 production and marketings were projected at 215.5 and 214.5 billion pounds respectively, down 200 million pounds from last month. If realized, 2017 production would still be up 3.1 billion pounds or 1.5 percent from 2016.

2018 production and marketings were projected at 218.8 and 217.8 billion pounds respectively, down 500 million pounds from last month. If realized, 2018 production would be up 3.3 billion pounds or just 1.5 percent from 2017.

The 2018 dairy product price projections were reduced due to slowing domestic demand and global competition. The 2018 Class III and Class IV milk price forecasts were reduced, based on the lower product prices.

The 2017 Class III milk price averaged $16.17 per cwt., up from $14.87 in 2016 and $15.80 in 2015. The 2018 average is projected to range $14.25-$15.05, which is $1.05 per cwt. below what was expected a month ago.

The 2017 Class IV price averaged $15.16, up from $13.77 in 2016 and $14.35 in 2015. The 2018 average is projected at $13.55-$14.45, down 35 cents per cwt. from last month’s estimate.

Fat basis imports for 2017 were reduced on slower butter imports, but exports were raised on solid global demand for U.S. butter and other dairy products. Skim-solids basis imports were reduced modestly while exports were raised on strong demand for skim milk powder and several other products.

The 2018 fat basis import forecast was reduced on slowing demand for butter products, while the export forecast was raised on expected robust foreign demand for U.S. fat-containing products. On a skim-solids basis, the 2018 import forecast was reduced on weak demand for U.S. milk protein concentrates. The 2018 skim-solids basis export forecast was raised reflecting stronger demand for a number of products.

 

Looking at the crop side of the report, the latest Margin Watch (MW) from Chicago-based Commodity & Ingredient Hedging LLC., reports that “USDA made minimal changes to their corn and soybean balance sheets, with slight increases in ending stocks noted for both crops. Corn production increased 26 million bushels from the December estimate as lower harvested acreage was more than offset by a higher yield, now projected at a record 176.6 bushels per acre. Lower projected feed and residual usage by 25 million bushels was partially offset by a 10-million-bushel increase in food, seed, and industrial demand. Soybean ending stocks increased as lower production was more than offset by a reduced export forecast,” according to the MW.

The MW also pointed out that “Dairy margins were mixed over the first half of January, weakening in nearby marketing periods due to lower milk prices, while holding steady in deferred slots through the second half of 2018. Margins remain negative and well below average from a historical perspective in both First and Second Quarter,” the MW states, “while above breakeven but still below average in Third and Fourth Quarters.” The MW warned that “Milk prices continue to struggle from the large overhang of dairy product stocks in the global market.”

Penn State’s January Dairy Outlook echoed the current situation in the dairy economy but offered some advice, stating that “The only way to face the year with optimism is to be sure dairy producers really understand their cost of production.” They point out that many dairy producers do not know their cost of production per cwt. and have done very little to benchmark costs to industry recommendations.”

“Penn State Extension, the Center for Dairy Excellence, and many lenders are skilled in helping producers determine their cost of production,” the Outlook states. “After a producer knows their numbers, then extension educators, private consultants, and dairy profit teams can work with producers to control costs to meet cost of production goals and examine opportunities to improve income. This is the only way to have optimism for the future,” the Outlook concludes.

 

Even as the road to forming a Federal milk market order in California is slowing progressing, the bleak outlook prompted Western United Dairymen (WUD) and California Dairy Campaign to petition the California Department of Food and Agriculture (CDFA) for an emergency hearing to consider increases to Class 1, 2, 3, 4a and 4b milk prices for 12 months.

The requested increase would add approximately 35 cents per cwt. to the overbase price, according to a WUD press release which argued; “California dairy families have su?ered severe economic hardship in the past three years. Many have gone out of business or acquired massive debt on top of eroded equity. The signi?cant negative margins witnessed every quarter since January 2015 have placed many producers in a dire ?nancial situation. 2017 displayed a modest recovery in the markets but the improvements were short lived and not signi?cant enough to allow for positive margins. According to CDFA’s cost of production data, the smallest loss recorded these past three years was 23 cents per cwt. of milk produced during the ?rst quarter of 2017.”

Checking the cash dairy prices; cheese and powder strengthened in the Martin Luther King Day holiday shortened week, buoyed in part by the GDT. The Cheddar blocks closed Friday at $1.5650 per pound, up 11 cents on the week but 13 1/4-cents below a year ago. The barrels finished at $1.3450, up 12 3/4-cents on the week, 19 cents below a year ago, but an unsustainable 22 cents below the blocks. Only 2 cars of block traded hands on the week at the CME and 45 of barrel.

Cheese production is mixed in the Central region, according to Dairy Market News, and some plants reduced output to manage growing supplies. Cheese sales were also mixed and Midwestern barrel contacts were “fretful, as prices dropped and buyers waited out continuing price slips or are simply hesitant to take on extra at this time.” Block sales are generally solid and beating some expectations but pizza cheese makers are concerned regarding inclement winter weather affecting the Northeast, where Super Bowl retail sales are typically strong for many Midwestern mozzarella and provolone manufacturers. Milk prices have tightened again. As many cheesemakers are opting out of the spot milk market, there were reports that milk offers have begun to wane as well. Reported spot prices ranged $3 under to 75 cents over Class III, says DMN.

Western cheese output is active due to plentiful milk supplies. Disruptions at several processing facilities released more milk into the market. Industry contacts say a few larger cheese plants have agreed to reduce down time or juggle production schedules in order to take the extra loads of milk. Cheese demand is fair. Manufacturers report the pizza season has generated solid sales for mozzarella, but retail demand is still tepid for most cheese types. Cheese purveyors would like to see much stronger demand to help reduce heavy inventories but recent lower prices are helping interest in the export market.

Spot butter closed Friday morning at $2.12 per pound, 4 cents lower on the week and 13 cents below a year ago, with 10 cars trading places.

DMN says cream remains readily available throughout the Central region and butter sales are generally on par with seasonal expectations. Butter markets are mixed. Some participants expect butter to remain above the $2.00 threshold, while others are starting to question its steadfastness, says DMN.

Western butter sales are quiet, but retailers continue to restock their shelves. A few processors report being surprised by how soon retailer re-orders came back post-holidays. Although current butter supplies are ample, abundant cream at lower prices is a big contributing factor to increased butter production but “Butter sales will have to increase substantially for a large reduction in inventory.”

Cash Grade A nonfat dry milk climbed to 71 1/2-cents per pound Thursday, highest price since November 20, 2017, but it closed Friday at 70 3/4-cents per pound, up 4 cents on the week but 29 3/4-cents below a year ago, with a whopping 33 cars exchanging hands on the week at the CME.

By the way; the European Commission announced that it will begin to limit the volume of skim milk powder (SMP) it purchases in its intervention program. There is plenty in storage, plus U.S. stocks are high, which is keeping pressure on prices.

FC Stone reported that provisional information shows that the EU Commission sold about 1,864 tons of SMP out of Intervention in the tender that closed January 16. It is reported that the lowest price accepted was €1,190 per ton. The total volume available was 101,020 tons. The last time the Commission sold any volume out of intervention was the tender that closed November 21.

The February Federal order Class I base milk price was announced by USDA at $14.25 per cwt., down $1.19 from January, $2.48 below February 2017, and the lowest Class I since July 2016. It equates to $1.23 per gallon, down from $1.33 in January and compares to $1.44 a year ago.

Speaking of fluid milk; sales continue to lag year ago numbers. USDA’s latest data shows November packaged fluid sales at 4.1 billion pounds, down 1.1 percent from November 2016.

Conventional product sales totaled 3.9 billion pounds, down 1.2 percent from a year ago; organic products, at 222 million pounds, were off 0.1 percent. Organic represented about 5.4 percent of total sales for the month.

Whole milk sales totaled 1.27 billion pounds, up 3.2 percent from a year ago, up 2.5 percent year to date, and made up 30.6 percent of total fluid sales in the month. Skim milk sales, at 335 million pounds, were down 10.2 percent from a year ago and down 11.9 percent, year to date.

Total packaged fluid milk sales in the nine month period totaled 43.9 billion pounds, down 2.0 percent from the same period a year ago.

Year-to-date sales of conventional products, at 41.6 billion pounds, were down 2.1 percent; organic products, at 2.4 billion pounds, were up 0.2 percent. Organic represented about 5.4 percent of total fluid milk sales so far in 2017.

On a brighter note; the U.S. Dairy Export Council (USDEC) reported that November U.S. dairy exports were the highest in more than a year, yet 2018 Class III milk futures prices portend very weak prices ahead.

Matt Gould, analyst and editor of the Dairy and Food Market Analyst newsletter, said in the January 15 Dairy Radio now broadcast that, leading up to November, U.S. dairy product prices were below those in Europe and New Zealand so the U.S. gained market share. He said that sales were particularly strong to Mexico in milk powders and cheese and we exported a lot of butter to the Middle East.

“That dynamic has shifted, which is part of the reason why prices are looking so glum in this new year,” Gould explained. “That was our big surge in exports that lots of people had been waiting for, which was supposed to carry prices higher. Now we’re going head to head with the rest of the world where U.S. prices are no longer at a big discount to the rest of the world so, what looked like opportunity in November certainly doesn’t look nearly as opportunistic going forward into 2018.”

When asked about the U.S. dropping out of the NAFTA and how significant that would be for dairy, Gould pointed out that Mexico is our Number 1 customer, but added “Pulling the plug on NAFTA is a complicated process.” He said there would be a six month timeline if President Trump opts out, and in that timeline, there would be a fair bit of negotiating that can be done before the whole agreement is ripped up. It’s certainly a point of high contention and important to markets,” he concluded, but it still has a lot of runway left to play out.”

And, speaking of exports; Cooperatives Working Together (CWT) accepted its first export assistance requests of 2018, 21, to be exact from Dairy Farmers of America, Northwest Dairy Association (Darigold), Tillamook County Creamery Association and United Dairymen of Arizona to sell 2.652 million pounds of Cheddar and Monterey Jack cheese and 688,945 pounds of butter to customers in Asia, the Middle East, North Africa and Oceania. The product has been contracted for delivery through April.