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Dairy product prices continue to soar

Columnist Lee Mielke's wrapup of the week's dairy news.

By Lee Mielke

For the Capital Press

Published on January 17, 2014 5:31PM

Lee Mielke

Lee Mielke

Cash cheese prices shot up sharply the week of Jan. 13, pulling Class III futures with them.

The blocks closed Friday at $2.23 per pound, up 3 cents on the week, 54 1/4-cents above a year ago, up 23 cents since Jan. 1, and the highest level since May 2008. The barrels closed at $2.2025, up 4 1/4-cents on the week, 56 1/2-cents above a year ago and up 35 1/4-cents since the first. Only three cars of barrel were traded on the week. The AMS-surveyed U.S. average block price hit $2.0050, up 5.1 cents. Barrels averaged $1.9490, down 1.8 cents.

The Class III contracts were trading late Friday morning at what are likely record highs for their respective months. January was at $20.94 per hundredweight, February was at $22.01, March was at $20.58, and April was at $19.58.

“It’s called supply and demand,” explained Jerry Dryer, editor of the Dairy and Food Market Analyst. He cautioned that the spike Thursday “hastens the day of a correction,” adding that there may be more spikes to come in the next week or two but warned, “That will put a dinger in demand.”

The market is supported by strong exports, he said. “Those exports are by and large hedged and sold out well into the second quarter so $2.25-$2.30 cheese doesn’t make any difference to that buyer. They bought it for $1.75-$1.85.”

Additional support comes from strong powder exports, Dryer said, which are moving some milk away from cheese and strong Mozzarella exports which are moving milk away from Cheddar, the price point at the exchange.

Dryer said demand is not just being driven by China.

“Pacific Rim countries are big buyers of our powder,” he explained. “Mexico is a big buyer of our powders and cheese, the Middle East is buying butter, the Russians are buying butter and cheese from Europe, taking them out of play in some of the markets where we’re exporting. The international demand is broad-based.”

Cash butter soared as well this week, closing at $1.8525 per pound, up 17 3/4-cents on the week, 34 3/4-cents above a year ago, up 32 cents since the first, and the highest it has been since November 15, 2012. AMS butter averaged $1.5750, up 0.7 cent.

Bulk butter inventories are tight, according to USDA’s Dairy Market News. Butter production is steady to increasing across the regions with focus on 82 percent production for export and rebuilding bulk butter supplies.

CWT approves export aid

Speaking of exports, Cooperatives Working Together announced its first 2014 acceptance of requests for export assistance this week. The five requests were on 533,519 pounds of butter and 707,684 pounds of Cheddar, Gouda and Monterey Jack cheese to customers in Asia, the Middle East and North Africa. The product will be delivered through June, will go to three countries, and are the equivalent of 18.57 million pounds of milk on a milkfat basis.

Cash Grade A nonfat dry milk closed Friday at $2.0975, up 2 3/4-cents and Extra Grade closed at $2.08, unchanged from last week. AMS powder averaged $2.0150, up 1.1 cent, and dry whey averaged 59.28 cents, down 0.5 cent.

The Chicago Mercantile Exchange will suspend trading of Extra Grade as of Jan. 27. Analyst Jerry Dryer praised the move, saying it “reduces the number of price points on powder, making it easier for hedging.”

Meanwhile, USDA reduced its 2013 milk production estimate in its latest World Agricultural Supply and Demand Estimates report, based on recent milk production data. It now pegs output at 201.3 billion pounds, down 300 million pounds from last month’s report, and compares to 200.3 billion in 2012. The forecast for 2014 was raised as improving returns are expected to support a more rapid increase in output per cow. Output is projected at 205.6 billion pounds, up 300 million pounds from last month’s estimate.

Dairy product and milk prices for 2013 were adjusted to reflect December data. Cheese, butter, and nonfat dry milk prices for 2014 were raised as export and domestic demand are expected to strengthen, but the forecast for dry whey was unchanged.

The Class III milk price was raised due to the higher cheese prices and the Class IV price forecast reflects higher butter and NDM prices. Look for the Class III price to average $17.80-$18.60 per hundredweight, up from the $17.05-$17.85 expected a month ago, and compares to $17.99 in 2013, $17.44 in 2012, and $18.37 in 2011. The 2014 Class IV price was projected at $19.80-$20.70, up 80 cents on both ends from last month’s estimate, and compares to $19.05 in 2013, $16.01 in 2012, and $19.04 in 2011.

The arctic air mass that covered the Upper Midwest and much of the Northeast sent temperatures and wind chills 25 to 50 degrees below zero, reports DMN. Milk production declined in those areas while output in other regions is trending higher along the typical seasonal trend. Class I demand is building as most educational institutions across the country have resumed classes.

California prices

California’s February Class I milk price is $23.11 per hundredweight for the north and $23.38 for the south. Both are up 27 cents from January and are $3.28 above February 2013. The Federal Order Class I base price is announced by USDA on Thursday, Jan. 23.

In California, DMN reports that feed and operational costs are weighing on producer margins in the nation’s No. 1 milk producer. The lack of snow and moisture in California is raising concerns of strengthening drought and water scarcity.

One of the factors behind the tight margins would be milk prices. California’s Milk Producers Council reports that California’s Class 4b price (for milk sold to the state’s cheese manufacturers) averaged $1.57 per hundredweight below the Federal Order Class III price (the benchmark price for milk sold to cheese manufacturers around the country). MPC says, “That puts the ‘California Discount’ at about $285 million for the year.”

The article adds that, “given the serious efforts currently underway to move forward with a USDA petition for a California Federal Order, there is little point in expanding this article” but addresses concerns voiced by one of its members regarding what it termed a “very interesting and disturbing comparison.”

It discusses the California quota system, making the point that it is a “valuable component of the industry” and “represents a significant amount of asset value for many of our state’s dairy families that needs to be protected.” It states that the collective underlying asset value of all California quota is reported at about $915 million, and recently as high as $1.075 billion.

It adds that, since January 2010, the California Class 4b price has averaged $1.68 per hundredweight below the Federal Order Class III price, representing a “California Discount” of more than $1.2 billion, and “larger than the underlying asset value of entire California quota program.” Details are posted at http://www.milkproducerscouncil.org/friday_updates.htm.

Wisconsin comes back

Meanwhile, the No. 2 milk producer, Wisconsin, is seeing its dairy industry revitalized. Ed Jesse, professor emeritus in the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison College of Agricultural and Life Sciences, in a recent online interview, pointed out that Wisconsin peaked in milk output around 1988 at about 25 billion pounds and, over the next 16 years slowly declined.

“We ended 2004 at about 22 billion pounds, Jesse explained. “We lost 3 billion pounds of milk and there was concern that we could be weakening the industry substantially. And a lot of efforts, dating way back to the mid-’80s, tried to start initiatives that would bring the industry back to its previous levels or beyond.”

Things turned around very abruptly in 2005, he said. “In 2004 Wisconsin was at about 22 billion pounds of milk, in 2013 we’ll be very close to 28 billion pounds and has been increasing milk production at the rate of about 600 million pounds a year, which is a phenomenal rate of increase.”

Jesse credits enlargement of dairy farms, modernization and more milk produced per farm, but says he’s seeing a lot of strength in the smaller dairy operations. “We’re not losing dairy farms nearly as rapidly as we did in the 1980s and the 1990s.” Smaller operations have found ways to remain profitable through grazing, organic, and value added kinds of products tied to grazing.” He concluded, saying “There are a lot of opportunities” but he also sees challenges, the biggest one being water, quantity as well as quality.

Farm bill update

In dairy politics, several dairy producer groups urged Farm Bill conferees to oppose supply management provisions in the Farm Bill Dairy Title, known as the Dairy Market Stabilization Program. A letter to that effect was signed by the Wisconsin Dairy Business Association, California Dairies Inc., National All Jersey, the Dairy Business Milk Marketing Cooperative, the Dairy Policy Action Coalition, the Northeast Dairy Producers Association, the Kentucky Dairy Development Council and the WIB Agri-Business Coalition.

But it’s a moot point. House Speaker John Boehner’s threat that he would not allow a vote on a farm bill containing supply management effectively killed the National Milk Producers Federation’s Dairy Market Stabilization Program.

Reading the handwriting on the Hill, NMPF issued a press release stating that “During the past four years that NMPF has worked to revise federal dairy policy, we have evaluated a variety of proposals against two key criteria: 1) does it provide an effective safety net for all of the nation’s dairy farmers? and 2) does it protect taxpayers from the possibility of excessive program costs through the use of suitable incentives for those enrolled in the program?”

It stated that “The resulting Dairy Security Act measure, contained in the farm bills approved by the House and Senate Agriculture Committees in 2012 and again in 2013, is a loss-prevention margin insurance program that meets those objectives.”

“We were initially heartened that the four bi-partisan leaders of the House-Senate farm bill conference committee included the DSA language in the package that they were planning to present to the full conference. Despite the long-standing opposition to this plan from Boehner, we were confident we had the votes in the conference committee to defeat any amendment to strike the market stabilization program.

Unfortunately, the speaker’s threat that he would not allow a vote on a farm bill containing the DMSP has effectively served to kill our proposal within the committee.”

NMPF says it is now engaged in discussions with agriculture committee staff on an alternative approach to creating a dairy safety net that would contain inducements to help achieve a supply-demand balance and prevent catastrophic milk price collapses like we experienced in 2009.”

“At this point,” NMPF says, “It is conceivable that an alternative mechanism could be developed, relying upon adjustments to the program’s margin insurance payout structure and participant premium rates, among other options. Any such approach must still offer an effective risk management tool to farmers, while containing suitable incentives to program enrollees to achieve cost controls. As always, the devil is in the details, and we will not support any program that does not effectively address the needs of our members throughout the U.S.”


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