By LEE MIELKE

For the Capital Press

The U.S. dairy industry is a step closer to making ingredient sales for food aid a commercial reality. Margaret Speich, of the U.S. Dairy Export Council, said that for several years the council has been reaching out to see that dairy proteins are recognized in food aid programs, not donations of U.S. surplus stocks, but commercial sales at commercial prices.

In early July, the Office of Food for Peace approved USDEC's application for whey protein concentrate to be used in programs administered by the U.S. Agency for International Development, Speich said. That means WPCs will soon be included in the list of ingredients that private voluntary organizations that implement those programs can purchase using USAID Food for Peace funds.

"The dairy industry knows the nutritional and functional value of dairy proteins," Speich said. "But the key was convincing food aid agencies. ... To gain preliminary approval, USDEC collected data on the nutritional value of whey and proof of its viability to treat childhood malnutrition in developing countries."

USDEC is also preparing further applications for sweet whey and whey protein isolates, sweet whey as a source of proteins and energy in supplementary foods, as a source of proteins in nutritional situations where low lactose and protein concentration are key. Funded by the dairy checkoff, it's a "win-win," Speich said

"(It) should lead to a profitable, sustainable commercial outlet for U.S. dairy solids and allow U.S. dairy farmers to feed hungry people around the world," Speich said.

Spilled milk

We don't have to cry over any spilled milk. There's plenty of it around. July production in the 23 major states totaled 15.3 billion pounds, up 3 percent from July 2009 and output in the 50 states totaled 16.5 billion, up 2.9 percent. Revisions added 23 million pounds to USDA's original June estimate, putting it at 15.2 billion pounds, up 2.9 percent from June 2009.

July cow numbers the 23 states totaled 8.37 million head, up 19,000 from June but 26,000 head less than July 2009. Output per cow averaged 1,830 pounds, up 59 pounds from July 2009.

California production was up 4.7 percent from a year ago, despite 41,000 fewer cows, but output per cow was up 130 pounds. Wisconsin was up 2.2 percent, thanks to 6,000 more cows and 30 pounds more per cow. New York was up 2.1 percent, on 10,000 fewer cows but output per cow was up 65 pounds. Idaho was up 5.2 percent, on 17,000 more cows and a 40 pound increase per cow. Pennsylvania was up 1.7 percent. Cow numbers were down 4,000 head but output per cow was up 40 pounds. Minnesota was up 1.4 percent, due to 1,000 more cows and a 20 pound gain per cow.

California production was up 4.7 percent from a year ago, despite 41,000 fewer cows, but output per cow was up 130 pounds. Wisconsin was up 2.2 percent, thanks to 6,000 more cows and 30 pounds more per cow. New York was up 2.1 percent, on 10,000 fewer cows but output per cow was up 65 pounds. Idaho was up 5.2 percent, on 17,000 more cows and a 40 pound increase per cow. Pennsylvania was up 1.7 percent. Cow numbers were down 4,000 head but output per cow was up 40 pounds. Minnesota was up 1.4 percent, due to 1,000 more cows and a 20 pound gain per cow.

The biggest increase was in Arizona, up 8.8 percent. Oregon was next, up 8.3 percent, and Washington State was third, up at 6.2 percent.

The biggest decline was in Missouri, down 7.8 percent, due to 8,000 fewer cows, and 5 pounds less per cow. Illinois was next, down 1.2 percent with 1,000 fewer cows, and output per cow down 5 pounds. Virginia had the third biggest drop at 0.7 percent with 1,000 fewer cows, but output per cow was up 5 pounds.

Other data

USDA's National Ag Statistics Service estimated 225,600 culled dairy cows were slaughtered under federal inspection in July, up about 11,400 head from June 2010, but 2,200 head less than July 2009. January-July 2010 dairy cull cow slaughter totaled about 1.6 million head, down about 78,000 from the same period a year earlier.

The cash dairy market seemed to ignore the bearish milk production data. Block cheese closed Friday at $1.6475 per pound, up 2 3/4-cents on the week, and 25 3/4-cents above a year ago. Barrel closed at $1.6150, up 3 cents on the week, and 24 1/2-cents above a year ago. The gains all came on unfilled bids. No cheese was traded on the week. The NASS-surveyed U.S. average block price hit $1.5974, up 1.4 cents. Barrel averaged $1.5913, also up 1.4 cents.

Butter stole the show, jumping eight cents on Thursday, and closed Friday at $2.04, up 121/4-cents on the week, 87 cents above a year ago, and the highest in six years. Eight cars were sold. NASS butter averaged $1.8508, up 4.8 cents.

Cash Grade A nonfat dry milk closed the week at $1.20, down a penny, while Extra Grade held all week at $1.2250. NASS powder averaged $1.1354, down 4.1 cents, and dry whey averaged 35.83 cents, down 0.1 cent.

Analyze this

Market analyst Alan Levitt, editor of the CME's Daily Dairy Report, said dairy has been a "weather market" this summer as cheese and butter price are up 10 to 15 percent since July 1. There's a sense that butter could move higher, but he's not sure that cheese can go much higher.

Levitt said cheese continues to move at retail and promotions on pizza have helped revitalize that category, boosting demand for mozzarella in particular. Schools are starting again, he said, another avenue for mozzarella cheese to move, but cheese buyers do not need to panic and build inventory. There's plenty of inventory on hand and buyers are comfortable with the pipeline stocks that are already there.

I mentioned USDA raising its 2010 milk production estimate by over 1 billion pounds and Levitt pointed out that cow numbers are coming back. July cow numbers might be down a little due to the CWT culling, he said. But the trend is for more cows and production per cow "has been going gangbusters" so "everybody is revising their forecast."

"Sexed semen may also have something to do with that, because there seems to be plenty of heifers waiting in the wings," he said.

Hot weather and humidity are doing a number of milk production and component levels. Production continues to decline seasonally and will until November, according to Levitt.

"We're on the downswing of that, although cheese production seasonally starts picking up in August and butter production picks up in September," Levitt said. "The yields are definitely a concern. Fat tests are running at 20-year lows."

Butter potential

Downes-O'Neill dairy broker Dave Kurzawski said the potential was there for butter to hit $2 and "probably even higher than that." Butter is tight and cream multiples are trading at well above normal averages right now, and he believes that will lend some support to cheese.

"This is typically a quiet time of the year," Kurzawski said. The block-barrel spread appears to be in balance, but he doesn't see that lasting much longer.

Will $2 butter attract imports?

"At some point you would think that should bring in some butter to our shores here," Kurzawski said. "But one of the reasons we're at $2 or close to $2 is because we have seen a dramatic drop off in imports this year, and I don't expect that to change by the end of the year."

He said that some people are looking to Oceania to see if any butter will come out of that region, but he doesn't expect much.

The high butter price and cheese prices at current levels is being driven more by weather than demand, but Kurzawski pointed out that there is fresh demand for butter. Russia is a buyer or is going to be a buyer, according to Kurzawski, and they also import nonfat dry milk and Russia has also had its weather concerns.

"Generally weather markets fade about as quickly as they develop," he said. "But in this case I do think there's some promising sales on the retail level. ... It's good to see that U.S. buyers are staying here to buy butter, and that has been the key to this butter price rally. ... I expect it will be this way through the balance of 2010."

As to risk management strategy, Kurzawski warns producers to be careful about selling 2010 contracts too aggressively. He recommends buying put options for the balance of 2010 and look for places to step into profitable levels in 2011.

The structure of the Class III market right now is bullish, he said, calling it "backwardation," which is a premium on the nearby months and prices get cheaper further out.

"That is a bullish structure," Kurzawski said. "I suspect that there's going to be a spike in prices over the next 30 to 60 days. The question is how sustainable is it?"

Tariff and prices

There was bad news on the export front this week as the Mexican government announced that it would impose tariffs of 20 to 25 percent on several major categories of U.S. exports to Mexico, including many cheeses. At issue is U.S. compliance with NAFTA obligations to provide Mexico with cross-border trucking access into the U.S.

The September federal order Class I base milk price was announced Friday at $15.50 per hundredweight, down 27 cents from August, but $4.57 above September 2009. The Class IV advanced pricing factor was "the higher of" in driving the Class I value and there will be no MILC payment to producers.

The NASS butter price averaged $1.8269 per pound, up 9.5 cents from August. Nonfat dry milk averaged $1.1542, down 7.9 cents. Cheese averaged $1.6008, up 15.1 cents, and dry whey averaged 35.86 cents, down fractionally.

Looking out

Reduced cow numbers are being more than offset by increased output per cow, leading to rising milk production, according to USDA's Livestock, Dairy and Poultry Outlook. Higher exports and rising domestic use will keep prices relatively firm, the report said. The immediate tightness in the butter market could be remedied by next year's higher milk production.

The most recent USDA forecasts indicate that feed prices will likely be higher next year than in the current year. The corn price forecast is $3.50-$4.10 per bushel for the 2010-11 crop year, a rise from current year projected prices. Soybean meal prices are forecast slightly lower, at $250-$290 per ton, for the 2010-11 crop year. The feed price outlook will keep the milk-feed price ratio for the balance of 2010 and into 2011 below a level that usually signals expansion.

Bulk milk storage

National Milk's Jamie Jonker described the Environmental Protection Agency's extension of the compliance date for bulk milk storage on dairy farms for Spill Prevention Control.

The EPA issued a proposal at the beginning of August to extend the deadline for one year, until after the bulk milk exemption is finalized, Jonker said. EPA has been seeking comments, which are due by Wednesday this week. National Milk responded by supporting the extension, he said.

Original language in the proposed regulation would have put milk in the same category as fuel oil or other oils stored on the premises. National Milk maintains that, with all of the inspections that occur on farms through the Pasteurized Milk Ordinance, dairy farms already meet the requirements. Jonker said it "seems silly" to have what he termed a "double indemnity," by having milk go through two processes.

"We feel confident the EPA is going to make the right decision and exempt bulk milk storage," Jonker said. But he warned that this will not exempt dairy producers from having SPC plans for other on-farm oil and fuel storage if they meet the regulatory minimum of 1320 gallons.

"We think it's appropriate that farmers follow the regulations for that," he said. "But we do look forward to EPA finalizing that exemption for milk."

Cooperatives Working Together

The CWT program announced the acceptance of nine export assistance bids from members to sell cheese, butter, and anhydrous milkfat to customers in Europe, Asia, the Middle East, and North Africa. The product will delivered September through February.

Federal policy debates

The debate over federal dairy policy continues, and this week that discussion moved to the Midwest. Dairy Profit Weekly editor Dave Natzke reported highlights from a Dairy Price Forum hosted by the Professional Dairy Producers of Wisconsin and Wisconsin Farm Bureau.

Natzke said the mood was probably summed up best by Bill Bruins, dairy farmer and Wisconsin Farm Bureau president, who said the major challenges facing the U.S. dairy industry include fixing domestic policy issues, while addressing the potential of growing global markets. He described the industry, which he said has been "entrenched in regional warfare over nickels and dimes," as moving closer to some consensus on policy issues.

Bob Cropp, University of Wisconsin-Madison professor emeritus, who is on USDA's Dairy Industry Advisory Committee, said three subcommittees will issue reports at the group's next meeting, Sept. 23-24. U.S. Ag Secretary Tom Vilsack will make preliminary policy recommendations by December 2010, with a final report due by March 2011, in time for 2012 Farm Bill consideration.

Jerry Kozak, CEO and president of National Milk Producers Federation, detailed provisions of National Milk's Foundation for the Future dairy policy proposal, stressing that, with escalating feed and production costs, the program was designed to protect producer income margins, not establish minimum milk prices.

Processor and producer panels offered their views of the Foundation for the Future plan and other dairy policy proposals, according to Natzke, with most agreeing that current policies are no longer effective.