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Shutdown fallout a matter of time

By Lee Mielke

For the Capital Press

Lee Mielke's weekly dairy wrap-up looks at the impact of the federal government's shutdown.

The government shutdown and its impact on the dairy industry continues to be assessed. As I pointed out last week, USDA invoked a special rule taken from the Code of Federal Regulations titled “Equivalent Price” to calculate last week’s September Federal order milk prices. The Ag Marketing Service’s missed surveys will not be completed once funding is restored.

Federal milk marketing order administrators estimated those surveyed equivalent product prices, along with earlier surveys to determine the class and component prices and they, along with any future milk price announcements, will not be revised.

The Upper Midwest Milk Market Order, Federal Order 30, was tapped again to calculate and publish equivalent prices to the National Dairy Product Sales Report (NDPSR) prices, according to the Oct. 9 Daily Dairy Report (DDR). The DDR stated that “the weekly price releases are courtesy of the market administrator’s office, which is still operational due to industry funding.”

The DDR added that “there was a collective sigh of relief from the industry that prices are being released, but the lack of weekly volumes is still problematic as monthly milk prices are calculated based on weighted product price averages. As a result, determining the ultimate milk price will most likely be a simple average of the equivalent NDPSR prices. Prices released Oct. 9 will also be the first of two weeks that will determine the advanced Class I milk price for November.” That price will be announced on Oct. 23.


Are reports necessary?


So how necessary are these reports? I posed that question to Cornell’s Andrew Novakovic. He said they’re more important and necessary than we would have imagined in September. He explained that we have changed the way we do marketing and pricing in the dairy industry and that has made the data a lot more essential, but “if it’s just a matter of a few days, we’ll get by fine. The longer this goes on the more problems are going to surface.”

The mandatory price reporting that the Ag Marketing Service (AMS) is doing, (formerly done by the National Agricultural Statistics Service) is perhaps the most important missing report and “essential,” according to Novakovic, because they are used by the Chicago Mercantile Exchange to settle futures contracts. That will come to the forefront at the end of the month, he warned, and they are used in the pricing formulas to establish federal order class milk prices.

Determining the advanced prices (Class I) in the middle of the month, Oct. 23, will be a challenge if this issue is not resolved by then, he said, as well as the announcement of October prices (Class II,III,&IV) out on Oct. 30.

Government shutdowns have happened before and have impacted NASS activities and other parts of USDA, he said, “but, in those times, not with the same consequences.”

“Futures markets weren’t as important,” he explained. “We didn’t have to worry about cash settling a Class IV contract because there wasn’t any such thing and federal orders could proceed without interruption.”

When asked if the industry could fund these reports, Novakovic said, “Potentially, but NASS has been very reluctant to allow users to fund major reports.” The fear is that it would “taint the perception of the bias nature of these reports.”

“That may become more of an issue in the future,” he concluded, “but our problem isn’t lack of money. Our problem is lack of political will to get the job done.”


Cash markets


Checking the cash markets, the block cheese price closed the second Friday of October at $1.80 per pound, up 3 1/2-cents on the week but 30 cents below a year ago. The barrels closed at $1.7650, up 1 1/2-cents on the week and 29 1/2-cents below a year ago. Eight cars of block traded hands on the week and 14 of barrel. The NDPSA block price averaged $1.8036 and barrels averaged $1.7857.

Cash butter lost ground for the first time in five weeks though it did regain a little on Friday from earlier week losses. The closing price was $1.5425, down 7 1/4-cents on the week and 38 3/4-cents below a year ago. Eleven cars were sold on the week. Holiday demand is slowing and, with plenty of butter in storage, no one seems worried about running out. THE NDPSA butter average was $1.5476.

Cash Grade A nonfat dry milk held all week at $1.8450 but Extra Grade gained 2 cents, hitting $1.80, the first price movement since Aug. 22. The NDPSA powder average was $1.8289, and the dry whey average was 58.05 cents per pound.

Evaluating the markets, Jerry Dryer wrote in his Oct. 4 Dairy and Food Market Analyst that “bulls keep talking about the holidays and export sales. Bears keep talking about huge inventories.”

“With the USDA information void, figuring out where the markets might go won’t get any easier,” he said. “That said, I still think these prices have some upside for all of the reasons other bulls cite. Supply is larger than usual, but so is demand.”

Dryer offered his own Dairy Products report, the first USDA report casualty from the shutdown. Based on August milk production data and Dryer speculated that production “staged a major recovery in California in August, thus supporting butter and powder production. Meanwhile, milk production gains in the Midwest and East were less robust than earlier in the year, so cheese output increases were moderated.”


Double-edged sword


The increasing importance of U.S. dairy exports remains a double-edged sword. Product moved offshore obviously adds strength to domestic prices here but as U.S. manufacturers start producing for the world market, what happens if and when that market slows and exports are reduced? Where does that product go?

Dairy Business Update editor Dave Natzke and I discussed exports with the U.S. Dairy Export Council’s (USDEC) Alan Levitt at World Dairy Expo and, while Levitt acknowledged the potential pitfalls of dealing in the world market, he remains bullish on the export potential.

He told us that more than 15 percent of U.S. milk is now exported, up from 5.7 percent 10 years ago, as the U.S. increases world market share. USDEC says this will be another record year and estimates 2013 dairy exports will reach 3.8 billion pounds milk solids, valued at $6.6 billion. Dairy imports are projected to be about 779 million pounds milk solids, and valued at $3.2 billion. Global prices remained strong in the second and third quarters and USDEC says the U.S. gained market share in the first half of 2013 in key products such as skim milk powder and cheese.

He cautions that the global milk supply will come back and admits world dairy product prices could slip in 2014 but does not see anything close to a crash.

The main reason? One word: China. China demand is underpinning the markets, according to Levitt, and cited as an example, that China is on pace to import more than 500 million metric tons of whole milk powder (WMP) this year, up from virtually nothing five years ago.

The U.S. is beginning to produce more WMP for export instead of just nonfat powder. World importers of WMP include China, Southeast Asia, Venezuela, Algeria, Nigeria, Brazil and Sri Lanka, in that order.

The top WMP exporters are New Zealand, the European Union, Argentina, Australia, Uruguay and Singapore.

New market access could be in the works to Canada and Japan via the Transpacific Partnership (TPP) although Levitt stated that the U.S. dairy industry insists the TPP agreement address the anti-competitive New Zealand dairy structure before the U.S. provides additional access to the Kiwis. In addition, Canada will not give up its supply management regime easily, but if reforms can be made the Canadian market offers huge potential to the U.S. dairy industry.

A fifth element in USDEC’s latest trade summary is the safety and quality factor. Consumers are highly sensitive to this, according to Levitt, and Fonterra’s recent powder issue with China was a prime example. USDEC says U.S. traceability best practices for dairy plants “should help.”

Finally on the demand side of things is the fact that the global population is on track to hit 9.1 billion by 2050, according to the U.N. Food and Agriculture Organization. USDEC points out that means 2.3 billion more mouths to feed than today and virtually all those additional mouths will reside in developing nations, primarily Asia and Africa. Dairy will be a big part of that food demand.

Speaking of the TPP, the International Dairy Foods Association charges that the government shutdown has put a damper on U.S. trade negotiations in the TPP and the Transatlantic Trade and Investment Partnership (TTIP). The Office of the U.S. Trade Representative (USTR) was already under budget constraints due to sequestration, and the shutdown further limits its capacity to negotiate and enforce trade deals as three-quarters of USTR employees are furloughed.

In addition, DBU reports that President Obama canceled his trip to Bali, Indonesia, where he was scheduled to host a meeting of the TPP leaders. The agreement is set to conclude at the end of the year, but more work is needed in several key areas, and the shutdown could hinder participation by USTR officials in future negotiating sessions.

Comparable problems are also affecting TTIP, according to DBU. The second round of negotiations between the U.S. and the European Union scheduled to be held this week in Brussels was also canceled due to the shutdown. A new date has not been scheduled and is unlikely until the shutdown is over.


CWT OKs export aid


Speaking of exports, Cooperatives Working Together (CWT) accepted 32 requests for export assistance this week to sell 4.890 million pounds of Cheddar, Gouda and Monterey Jack cheese and 7.540 million pounds of butter to customers in Asia, Central America, Europe, the Middle East and North Africa.

The product will be delivered through March 2014 and raised CWT’s 2013 cheese exports to 106.900 million pounds plus 79.795 million pounds of butter, 44,092 pounds of anhydrous milk fat and 218,258 pounds of whole milk powder to 37 countries, the equivalent of 2.783 billion pounds of milk on a milkfat basis.

In politics, DBU reports that U.S. Rep. Kristi Noem, R-S.D., a member of the House Ag Committee, said she has received an assurance from Speaker of the House John Boehner that he will appoint House conferees within a week to the House-Senate Farm Bill conference committee. The naming of House conferees will allow formal Farm Bill conference negotiations to begin, bringing the Farm Bill one step closer to completion.

The recent blizzard in South Dakota, which killed an estimated 60,000 head of cattle, has added urgency for lawmakers in the region. Sen. John Thune, R-S.D., wrote letters calling for action from Boehner and Secretary of Agriculture Tom Vilsack, including reauthorization of livestock disaster programs, and opening of USDA Farm Service Agency offices to assist affected producers.

World Dairy Expo attendance was just shy of 71,000 people and the top five international attendees were from Canada, Japan, Mexico, Germany and Brazil. Some 843 companies from 29 countries, 43 states, and six Canadian provinces exhibited at the show. There were 1,616 cattle exhibitors from 36 states and seven Canadian provinces. Complete details of the cattle sales and fitting and showing results are posted at www.worlddairyexpo.com.



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