The Lee Mielke Market Update October 20

Lee Mielke

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.

Clouds continue to form on the dairy price horizon with rising global milk production, growing global powder supplies, political tensions both home and abroad, and Class III futures prices with nothing above $16 per hundredweight until July 2018.

The October 17 Global Dairy Trade (GDT) auction saw a slightly lower amount of product come its way, at 78.6 million pounds, down from the 83.75 million pounds on October 3 but still above the 75.2 million pounds on September 19. The weighted average for products offered was down for the second consecutive event, down 1.0 percent, following the 2.4 percent descent on October 3.

The only product offered that gained on the day was anhydrous milkfat, up 5.2 percent, following a 3.4 percent loss last time.

Rennet casein led the declines, down 8.6 percent. Skim milk powder (SMP) was next, down 5.6 percent, following a 1.4 percent lapse. Butter was down 2.5 percent, after it dropped 3.6 percent last time. Whole milk powder inched 0.5 percent lower, after it dropped 2.7 percent, and Cheddar cheese was off 0.1 percent following a 1.9 percent jump in the last event.

FC Stone equated the GDT 80 percent butterfat butter price to $2.5383 per pound U.S. CME butter closed Friday at $2.35. GDT Cheddar cheese equated to $1.8628 per pound U.S. and compares to Friday’s CME block Cheddar at $1.67. GDT skim milk powder averaged 81.53 cents per pound and whole milk powder averaged $1.3671 U.S. CME Grade A nonfat dry milk closed Friday at 74 cents per pound.

Mid-October cash dairy prices at the Chicago Mercantile Exchange were down across the board as traders awaited Friday afternoon’s September Milk Production report, which I will detail next week. The 40-pound Cheddar blocks closed the third Friday of the month at $1.67 per pound, down 3 cents on the week but 2 cents above a year ago, with 13 cars selling on the week. The 500-pound Cheddar barrels finished Friday at $1.64, down 3 3/4-cents on the week but 7 cents above a year ago, on 27 sales for the week.

Midwestern cheese producers report continuing declines in milk availability, says Dairy Market News (DMN). “Some Colby and Muenster style cheesemakers are seeing a big holiday push, as Cheddar and pizza cheese producers are reporting steady to strong output prior to the holiday season. Large and aging barrel inventories continue to countervail an overall positive market tone. However, stable demand and healthy prices resonate to contacts as bullish undertones.”

Western contacts report that cheese supplies are mixed. Some processors have lower inventories while others have plentiful supplies. In some areas, older stocks of Cheddar blocks are sold at relatively lower prices. Domestic sales are solid. Production is steady and more than enough to meet end-users/buyer’s needs. Most manufacturing plants are running close to full capacity, says DMN.

Cash butter saw nine sales on the week and closed Friday morning at $2.35 per pound, down 2 1/2-cents on the week but 59 cents above a year ago when it hit the bottom for 2016 at $1.76 before heading back up.

The global market for milk fat continues to be tight, according to the USDA’s latest Livestock, Dairy, and Poultry Outlook issued this week. “The September average Western Europe export butter price reached a record high of $3.65 per pound,” the Outlook stated, “and the Oceania price was $2.82. Both foreign export prices were higher than the U.S. wholesale domestic price of $2.53 per pound. For the two weeks ending October 13, Western Europe and Oceania export prices for butter remained high but declined to $3.43 and $2.66 per pound, respectively.” It warned that “As milk flowed into production of high milk-fat products, skim solids have become abundant, driving down prices for SMP and nonfat dry milk.”

DMN says retail butter orders remain robust. Butter producers across the Central region report that interest is continually higher than expected. Even so, as cream has been available and butter production is active, butter supplies are meeting demand needs.

Western butter makers say production is ramping up for the holiday push. “Although not having any trouble getting cream, a few butter processors say cream is a little tight and they would take a few more loads if priced right. Manufacturers are starting to see holiday interest percolating, but so far buyers have been holding back on major butter purchases. A few contacts speculate butter shoppers have made their buys steadily over the last few months and therefore have avoided creating any large holiday price runs. Current domestic demand appears to be in good balance with production. Inventories are relatively steady,” says DMN.

Cash Grade A nonfat dry milk closed Friday at 74 cents per pound, down 3 1/4-cents on the week and the lowest price since April 19, 2016, and is 14 cents below a year ago. Twenty three cars found new homes on the week at the CME.

U.S. dairy cow culling took a dip in September but was slightly above a year ago. USDA’s latest Livestock Slaughter report shows an estimated 249,600 head were slaughtered under Federal inspection, down 16,000 from August but 4,500 head above a year ago. Culling in the first nine months of 2017 totaled 2.24 million head, up 84,100 from a year ago or 3.9 percent.

The Daily Dairy Report’s Sarina Sharp wrote in the October 13 Milk Producers Council newsletter that “Dairy slaughter has been running very high the past three months, pushing the year-to-date cull rate up 3.9 percent from last year. This is partially due greater cow numbers, but slim margins are also to blame. Perhaps the U.S. herd is finally poised to pause its formerly unflagging growth.”

The latest Margin Watch (MW) from Chicago-based Commodity & Ingredient Hedging LLC, reports that dairy margins have “slipped since the middle of the month, as lower class III and IV milk futures, flat corn, and higher soybean meal contributed to the leaks. Yet margins are still hovering at above average levels from a historical perspective across the board.”

“Milk futures continue to search for a bottom after the late summer slide,” the MW stated. “Recent dairy export data for August was encouraging, with total dairy and product exports gaining almost 11 percent month over month, while on a yearly basis were lower by just 1.3 percent. Exports of U.S. cheese and cheese curds were 11.4 percent greater on the month and 33.7 percent greater on the year, with butter and milkfat exports up 20.8 percent and 189.0 percent respectively. NDM August exports showed monthly gains of 16 percent, but were 6.8 percent less than August 2016.”

“NDM inventories as of the end of August were off the charts at 10-year highs of 308 million pounds, 31 percent greater than storage levels last year. Also troubling the dairy markets were rumblings of changes to the EU’s Intervention Program and worries of wholesale clearances of built-up SMP inventories. Trial balloons were floated about ending the program early next year rather than waiting until formal Common Agricultural Policy negotiations take place in 2020, and perhaps conducting tender offers for existing balances,” the MW concludes.

The EU has closed its Intervention program resulting in more powder coming to the market and more downward pressure on prices but those “rumblings of changes” to the program which I reported on last week, were called “illogical” in my October 23 Dairy Radio Now interview with Jerry Dryer, editor and analyst of the Dairy and Food Market Analyst newsletter.

Fresh from the week’s U.S. Dairy Export Council Board meeting, Dryer said the EU commission “has no idea what they’re doing, no concept of the commercial marketplace, and there’s clearly no firm plan as to what the next move is.” He said the disposal of this product will be and already has disrupted the market, putting downward pressure on prices and “there’ll be more downward pressure.”

We discussed the NAFTA talks and, while the Trump Administration’s call for an end to Canada’s supply management program won’t likely happen, the issue of Canada’s new Class milk pricing system, which is dumping even more powder on the world market, may draw increasing pressure for its end. Dryer said the outlook for NAFTA is “difficult at best,” “with dozens of possible outcomes.”

Meanwhile milk output is rising in the EU and Oceania and Dryer cited Rabobank’s latest outlook, as well as his own and that of others, and all see “more milk on the way at least through the First Quarter of next year.”

In politics, the National Milk Producers Federation weighed in on the NAFTA talks, stating in a press release that the proposal advanced by the U.S. Trade Representative is “the right approach to move dairy trade between our two countries closer to the free trade relationship that exists for most other agricultural products under NAFTA. For too long, Canada’s exorbitant tariffs on dairy imports, (250-300 percent) have been at odds with an overall free trade policy between our countries. The administration’s proposal to reduce those tariffs and increase dairy trade between the U.S. and Canada is good for consumers on both sides of the border.”

“Equally important,” says NMPF, “we are very pleased with the U.S. insistence that Canada rescind its new Class 7 milk pricing scheme.”

Speaking of Class prices; the November Federal order Class I base price was announced by USDA at $16.41 per hundredweight, down 3 cents from October but $1.63 above November 2016. It is the lowest Class I since June 2017.

It equates to about $1.41 per gallon, up from $1.27 a year ago, and puts the eleven month Class I average at $16.41, up from just $14.61 at this time a year ago and compares to $16.30 in 2015.

Fluid milk consumption continues to struggle. The latest USDA data shows August packaged fluid sales totaled 4.0 billion pounds, down 2.6 percent from August 2016.

Conventional product sales totaled 3.8 billion pounds, down 2.8 percent from a year ago; organic products, at 218 million pounds, were down 0.2 percent. Organic represented about 5.4 percent of total sales for the month.

Whole milk sales totaled 1.3 billion pounds, up 1.9 percent from a year ago, up 2.3 percent year to date, and made up 31.5 percent of total fluid sales in the month. August skim milk sales, at 341 million pounds, were down 11.9 percent from a year ago and down 12.3 percent, year to date.

Total packaged fluid milk sales in the eight month period totaled 31.6 billion pounds, down 2.2 percent from the same period a year ago.

Year-to-date sales of conventional products, at 29.9 billion pounds, were down 2.3 percent; organic products, at 1.7 billion pounds, were up 0.8 percent. Organic represented about 5.4 percent of total fluid milk sales so far in 2017.

The figures represent consumption of fluid milk products in Federal milk order marketing areas and California, which account for approximately 92 percent of total fluid milk sales in the U.S.

The Agriculture Department’s latest Crop Progress report shows 28 percent of U.S. corn has been harvested, as of the week ending October 15, up from 22 percent the previous week but 16 percent behind a year ago and 19 percent behind the five year average. Sixty five percent is rated good to excellent, up 1 percent from the previous week but 9 percent behind a year ago.

The report shows 49 percent of the soybean crop is harvested, up from 36 percent the previous week, 10 percent behind a year ago, and 11 percent behind the five year average, with 61 percent of the crop rated good to excellent, unchanged from the previous week, and 13 percent behind a year ago.

The Dairy Outlook reported that “For the 2016/17 marketing year, prices for corn and soybean meal are estimated to be $3.36 per bushel and $316.88 per short ton, respectively. The 2017/18 price forecasts for corn and soybean meal are both unchanged from last month’s forecasts at $2.80-$3.60 per bushel and $290-$330 per short ton, respectively. The alfalfa hay price in August was $147 per short ton, $5 less than July but $10 more than August 2016.”

“Based on recent cow numbers, the forecast for the 2017 milking herd has been lowered by 5,000 head in the fourth quarter. With strengthening year-over-year growth in yield per cow since June, the forecast for production per cow has been raised to 23,010 pounds for the year, 30 pounds higher than last month’s forecast. The milk production forecast for 2017 is now 216.2 billion pounds, 200 million pounds higher than last month’s forecast.”

“The 2018 yield-per-cow forecast has been raised to 23,335 pounds, 40 pounds higher than last month. Milk cow numbers have been lowered by 5,000 pounds for the first quarter of 2018, but no changes have been made to the forecasts for the outlying quarters. The milk production forecast for 2018 is 220.4 billion pounds, 300 million pounds more than last month’s forecast.”

The dairy farmer-funded Cooperatives Working Together (CWT) accepted four requests for export assistance the week of October 16 from a member to sell 965,625 pounds of Cheddar cheese to customers in the Asia, the Middle East and Oceania. The product has been contracted for delivery from November through January 2018 and raised CWT’s 2017 export sales to 56.19 million pounds of American-type cheeses, and 4.56 million pounds of butter (82 percent milkfat) to 21 countries.

California’s Milk Producers Council Board has given a thumbs up to the Producer Review Board’s proposed Quota Implementation Plan. The plan allows for the continuation of the California quota program if California dairy producers vote to join the Federal Milk Marketing Order (FMMO) program.

Ballots have been sent to producers but again this is not a vote on the FMMO but on the plan to operate the quota system if producers elect to join the FMMO.