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Dairyline: Product prices may see 'incremental gains'

Published on September 18, 2010 3:01AM

Last changed on October 16, 2010 7:58AM

Lee Mielke

Lee Mielke


For the Capital Press

There weren't many changes in the cash dairy markets the week of Sept. 13 as they awaited Friday afternoon's August Milk Production report, which I will detail next week. The block cheese price held all week at $1.7350 per pound. That's 40 1/2-cents above that week a year ago. Barrel closed at $1.71, up a half-cent on the week, and 42 cents above a year ago. Eight cars of block traded hands on the week and three of barrel. The NASS-surveyed U.S. average block price hit $1.6683, up 2.7 cents, and barrel averaged $1.6906, up 3.9 cents.

Butter was also unchanged on the week, holding at $2.2225, up 95 1/4-cents above a year ago. Only two cars were sold all week. NASS butter averaged $2.1317, up 3 cents. NASS nonfat dry milk averaged $1.1195, down 2.7 cents, and dry whey averaged 36.02 cents, down 0.2 cent.

Market analyst Mary Ledman, principal of Keough Ledman and Associates Inc. in Libertyville, Ill., said she didn't believe the markets had topped out and said we might see some "incremental gains" but no major 1 to 3 cent jumps. She sees things holding through the end of September but warned "October could bring with it a different story."

Ledman expects August milk production to be similar to July output. Cow numbers will continue to strengthen, she said, though not likely repeat the 20,000 head increase of July over June. She pointed out that cull and slaughter rates have fallen in the last month, so she expects cow numbers to expand though milk per cow will likely decrease from July in the Midwest and Northeast. She warned that output will likely be strong in the West where weather has been favorable.

Demand is the other big factor. Ledman said it's still "sluggish domestically but internationally has pulled us up." She adds the caveat that we're approaching Oceania's peak milk production season. U.S. dairy exports were strong through July but she expects a slowdown in the third and into the fourth quarter as Oceania's milk production increases and adds more production to the global supply.

Speculators in the dairy markets are bullish, according to Downes-O'Neill dairy broker Dave Kurzawski. Kurzawski referenced a recent Commitment of Traders report from the U.S. Commodities Futures Trading Commission and said "higher prices could lie ahead."

The weekly report details the makeup of traders in any given market, dairy included, Kurzawski said.

"(It) is one of the more underutilized reports to dairy traders, but it certainly does key us into what various traders are doing," he said.

The higher prices Kurzawski is referring to is the Class III futures.

"If you look at the Commitment of Traders report, there's interest by large speculators to be long in Class III futures or options, meaning that they think there's going to be more upside potential to price," he said.

He warned that this doesn't mean they're right, but it does mean "the people who have no real physical skin in the game, except to trade the price, are bullish."

The report points out that this is the first time speculators have been bullish on Class III milk since August 2008. Kurzawski called it "an interesting dynamic to look at in terms of the makeup of the market" and "means that the people that are in the market solely for profit want to own milk."

What does this mean for producer hedging?

"It will probably open up a lot of opportunity to buy put options or even sell futures at some point in time," Kurzawski said.

He doesn't recommend selling futures at this level right now, going into 2011 but suggests looking at put option opportunities going into next year. For more details, call Dave at 800-231-3089.

Record harvests

Record corn and soybean crops will not mean a break for dairy feed prices. USDA updated 2010 crop estimates, forecasting a record-high soybean crop of nearly 3.5 billion bushels and, even though the corn harvest forecast was lowered somewhat, it is still expected to be a record-high 13.2 billion bushels.

But the dairy feed price picture was clouded despite those record crops by a separate supply and demand report, according to Dairy Profit Weekly editor Dave Natzke.

"The agency raised expectations for soybean exports, especially to China, putting a dent in expected season-ending inventories," Natzke said. "USDA raised corn-use projections for both ethanol and exports, reducing corn stocks to the lowest level in seven years and inventories as a percent of annual use to the lowest level since 1996."

As a result, USDA projects season-average soybean prices at $9.15 to $10.65 per bushel, up 65 cents from previous forecasts, with projected soybean meal prices raised $20 per ton, to a season average of $270 to $310.

USDA now projects the season-average corn price to be between $4 and $4.80 per bushel, up by 50 to 70 cents from previous forecasts. The corn futures market is also moving higher, and as of mid week, 2011 corn contracts were averaging nearly $5 a bushel, Natzke said.

That points to another factor, Natzke said. As Downes-O'Neill dairy broker Dave Kurzawski noted, higher commodity prices are attracting more market speculators. Renewable Fuels Association vice president of research Geoff Cooper said speculators now control almost as much corn as the entire ethanol industry used in all of 2009.

"Even though milk prices are expected to improve, higher feed prices will take a bigger bite out of dairy farmer income," Natzke said.

On the price front

The October federal order Class I base price was announced Friday morning at $16.58 per hundredweight, up $1.08 from September and $4.23 above a year ago. That put the 2010 average at $15, up from $11.09 a year ago, and compares to $18.32 in 2008.

The NASS butter price averaged $2.1198 per pound, up 29.3 cents from September. Nonfat dry milk averaged $1.1351, down 1.9 cents. Cheese averaged $1.6747, up 7.4 cents, and dry whey averaged 36.07 cents, up fractionally.

California's October Class I price is $18.44 per hundredweight for the North and $18.71 for the South, up $1.29 and $1.28 respectively from September, and $4.69 above October 2009.

Cooperatives Working Together

The Cooperatives Working Together program announced that it is suing an Illinois livestock auction market for violating terms of its recent herd retirement. A CWT press release states that the firm purchased the cattle from a CWT member whose bid was accepted but, instead of selling the cattle for slaughter, apparently resold them to a different farmer. Details are posted at www.dairyline.com for Sept. 14.

Legislative action

Meanwhile, National Milk Producers Federation's Chris Galen outlined some legislative issues of interest to dairy farmers that await action by Congress.

"There'll be a whole lot of posturing and rhetoric, but the real question is: Are they going to be doing anything in the next three weeks?" he said. "We obviously have a very momentous election looming the first Tuesday in November, and Congress is anxious to come back into Washington and then leave and go back home and campaign come October."

First and foremost in the federation's eyes is the mandatory dairy and meat price reporting bill, which would mandate weekly electronic reporting of dairy commodities, something the group has worked for.

The House approved legislation on Wednesday that reauthorized other USDA price reporting programs for five years. The House action follows similar final approval in the Senate earlier this summer, meaning the bill will become law once President Obama signs it.

The other big story this summer, according to Galen, is the massive egg recall. He said that may prompt Congress to pass a new food safety bill.

Another lingering issue is the reauthorization of the Child Nutrition Act, which governs the school lunch program and has many consequences for the dairy industry. Galen said the first lady and other prominent people are urging Congress to act on this before the end of the year.

An issue that not only affects dairy but all citizens is the renewal of the reduced tax rates on capital gains and income taxes. Galen said that will be a "huge partisan football, and we'll see where that ends up settling."

We emphasize the importance of farmers contacting their lawmakers to make their voices heard.

"They're all going to be asking for your vote, and it's a good time for dairy farmers and others to weigh in with what they see the priorities needing to be for the dairy industry and for the country," Galen said.

Checkoff partners

A partnership between dairy producers, through the checkoff-funded National Dairy Council and Newsweek, has led to the distribution of more than 1 million copies of the "How to Build a Healthy Kid" back-to-school guidebook.

Dairy Management Inc.'s Joe Bavido said multiple copies of the guidebook, developed and produced by Newsweek, will be included in information being distributed to more than 60,000 schools participating in NDC's Fuel Up to Play 60 program this fall. The program, also called FUTP60, is a collaborative in-school effort with the National Football League that encourages the consumption and availability of nutrient-rich foods, including low-fat and fat-free dairy, along with 60 minutes of daily physical activity.

National and local dairy checkoff organizations will use remaining copies of the guidebook as a tool to help engage additional partners and resources among health professionals, local school officials and community leaders.

FUTP60 is heavily emphasized in the guidebook, which includes strong messages of support from USDA Secretary Tom Vilsack and former Surgeon General David Satcher. NDC provided FUTP60 success stories that showcase nutrition and physical activity, a health and nutrition advertorial that highlights the benefits of flavored milk, supported by leading health professional organizations, a pledge of support for school-based initiatives such as FUTP60 from various health and nutrition organizations, including the American Dietetic Association, American Academy of Pediatrics, American Association of Family Physicians, and School Nutrition Association

"This guidebook is unprecedented for the dairy checkoff in gaining third-party support for our in-school program," Bavido said.

"Working with Newsweek to produce a high-quality educational tool speaks volumes about the acceptance and impact of Fuel Up to Play 60. This effort will make a difference in the lives of students, while reinforcing a positive view of dairy through credible, independent sources."

For more information, log on to www.fueluptoplay60.com

Lee Mielke is a syndicated columnist and farm broadcaster based in Lynden, Wash. Learn more at www.dairyline.com


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