By LEE MIELKE
For the Capital Press
As I write this my last column of 2012, I check the cupboards and there's good news and bad in butter. The November Cold Storage report shows butter stocks at 127.1 million pounds, down a whopping 12 percent from October -- so demand was there, but stocks are up a whopping 36 percent from a year ago.
The Dec. 24 Daily Dairy Report said: "This year's smaller than normal decline belies soft demand for butter and indicates retailers were able to secure inventories earlier in the year and did little buying in November. It also explains the sizeable break in butter prices that began in November and suggests that despite these lower prices November butter exports could have slowed after robust sales in October."
Cash butter remains in a meltdown, losing another 4 cents Christmas week, and fell to $1.4975, 9 3/4-cents below a year ago. Two cars were sold on the week. AMS butter averaged $1.6017, up 0.7 cent.
Cash Grade A and Extra Grade nonfat dry milk remained at $1.5575 and $1.56 respectively, where they have been since late November. AMS powder averaged $1.5596, up 1.4 cents, and dry whey averaged 66.78 cents, up 1.3 cents.
A combination of factors is influencing prices, according to DMN. Butter prices declining to levels last present during mid-July, cream offerings being heavy and expected to increase, and butterfat tests since July substantially above the last few years, all lead to surplus cream that exceeds demand. The surplus is expected to increase due to the holidays. The only real and viable outlet for the surplus cream will be the churn, warns USDA.
This leads to a complex situation where manufacturers are averse to building inventories concurrent with downward index prices and retail butter orders are dropping, DMN said. Some butter manufacturers in the Northeast are increasing production of unsalted 82 percent butter targeted for the export market, where export demand from the Middle East remains good.
Peering over the cliff
There has been a lot of media attention to the so-called "fiscal cliff" the U.S. faces and agriculture, including dairy, has a fiscal cliff of its own regarding pricing policies reverting back to 1949 and what that entails. Editor Mary Ledman talked about it in her Dec. 21 Daily Dairy Discussion posted on the DDR website.
The DDR predicted that: "Despite news reports to the contrary, retail milk prices are not going to double next month. DDR analysts agree that the dairy sector is a pawn in a political game, with players pointing to looming rising milk prices (whether practical or not) as a way to attract media and consumer attention.
"The agriculture sector faces its own version of the fiscal cliff if a U.S. farm bill is not passed or extended by January 1," the DDR wrote. "If nothing is done, laws and policies governing agriculture revert to the Agricultural Act of 1949."
According to the Act, "The price of whole milk, butterfat, and the products of such commodities, respectively, shall be supported at such level not in excess of 90 per centum or less than 75 per centum of the parity price therefore as the Secretary determines necessary in order to assure an adequate supply." Parity refers to the 1910-14 "golden era" of agriculture when commodity prices were particularly high, the DDR said.
USDA's monthly Agricultural Prices report includes a table with parity prices. The November 2012 parity prices for corn and all-milk are $12 per bushel and $52.10 per hundredweight, respectively, and reflect the purchasing power of corn and milk in 1910-14. And 75 percent (per centum) of $52.10 is $39.08. Interestingly, 75 percent of the $12 corn parity price is $9, only about $2 higher than current prices. Thus, the current market price for corn is a lot closer than milk to its parity price.
Historically, when the government supported corn prices, farmers simply sold corn to the government at a predetermined price if it was higher than the market price. Because milk is a perishable product, the all-milk support price is converted into support prices for more-storable cheddar block and barrel cheese, butter and nonfat dry milk.
Current support prices for cheddar blocks and barrels are $1.13 and $1.10 per pound, respectively. The butter support price is $1.05 and nonfat dry milk's is 80 cents. These product prices translate into a theoretical all-milk support price near $9.80 per hundredweight for milk containing 3.5 percent butterfat.
For the secretary of Agriculture to support milk prices at not less than 75 percent of parity, the secretary would need to almost quadruple the current dairy product support prices. In other words, the support price for blocks would be near $4.50 per pound and the support prices for butter and nonfat dry milk would be about $4.20 and $3.20 per pound, respectively.
If the secretary were to announce higher support prices, would dairy producers receive $39 per hundredweight for their milk and would retail milk prices really double? The short answer is "no," according to the DDR. More details are in the Dec. 21 DDR. To subscribe, log on to www.dailydairyreport.com
The International Dairy Foods Association called on Agriculture Secretary Tom Vilsack to avoid or delay the impact of the 1949 law. IDFA outlined legal options available to the government to avoid this "dairy cliff," and described the authority the secretary has to avoid affecting milk markets, which would give Congress additional time to finish a new farm bill in the new year. The 2008 Farm Bill expires on Dec. 31, 2012.
"Although a sudden and unpredictable increase in milk prices may result in a short-term financial windfall to dairy producers, the immediate implementation of the 1949 Act would dramatically increase government spending, would force consumers to pay significantly more for dairy products and would impose long-term damage to the dairy industry," according to IDFA .
In the "dairy war out west," Dairy Profit Weekly reports that Western United Dairymen has proposed temporary formula changes to increase Class 1, 2, 3 and 4b milk prices in California during a hearing on Dec. 21.
The temporary increases are sought for a period of six months, the maximum allowable period set by California Department of Food and Agriculture Secretary Karen Ross. WUD's proposed changes would raise Class 1milk fat 1.05 cents per pound, raise milk solids-not-fat 8.93 cents; and raise the milk fluid carrier 0.26 cents per pound. Class 2 and 3 milk fat and milk solids-not-fat would rise 8.2 cents per pound, and Class 4bsolids-not-fat would jump 11.5 cents per pound.
WUD CEO Michael Marsh said escalating feed prices and regulatory pressures in the state were key factors in rising costs, calling on CDFA to take immediate action on the price formulas. CDFA has 62 days to respond to the proposals presented at the Dec. 21 hearing. Check the CDFA website for more details.
Finally, a thought on dairy profitability that is not quite so, pardon the pun, "black and white." The American Jersey Cattle Association reported that for the first time in history it recorded 100,000 animals in a single year.
The previous record, 96,174 set in 2011, was broken on December 26, attesting to rapid expansion of the Jersey population across the U.S. and of producers recognizing the value of identified and performance tested Jersey cattle.
Association Executive Secretary Neal Smith said: "This is a milestone for not only the association and its members, but also for the Jersey breed worldwide. The smaller, more efficient Jersey cow is the solution to the challenges of profitability and sustainability confronting dairy herd owners, no matter how small or large their operations are. Jerseys produce the most valuable components of milk, proteins and fat, with less feed, using less energy, water and land, and with a smaller total carbon footprint."
FC Stone's Dec. 27 eDairy Insider Opening Bell suggested that the winter storm tracking across the Eastern portion of the country "could be playing a role in this week's quiet markets as travelers struggle to get to the office and return home from Christmas travel. The storm had already dumped more than a foot of snow on parts of Pennsylvania and New York."
DMN reports that manufacturing milk supplies were increasing across the nation going into the holiday period due to seasonal declines in Class I and II demand. Manufacturing milk supplies were expected to keep dryers at or near capacity levels in the Eastern and Central regions and Western processors were expected to have adequate capacity to handle the increased volumes.
Milk production is increasing steadily in the Northeast, Mid-Atlantic and Central regions with rising protein and butterfat levels. Production in California and the Southwest is steady to building slightly but below a year ago. A new yogurt plant has opened in Idaho and will be ramping up the amount of milk it takes.
American cheese, at 581.3 million pounds, was unchanged from October but 2 percent below a year ago. Total cheese stocks amounted to 941.8 million pounds, down 1 percent from October and 4 percent below those a year ago.
The cash block cheese market closed the shortened Christmas holiday week at $1.74 per pound, unchanged on the week but 17 3/4-cents above a year ago. Barrel closed at $1.71, up 5 1/2-cents on the week, 13 cents above a year ago, and re-established the more typical spread. Seven cars of barrel was the only cash cheese sold on the week. The AMS-surveyed U.S. average block price fell to $1.7833, down 3.1 cents, while the barrels averaged $1.7151, down 3.9 cents.
Cheese production continues at accelerated levels, according to Dairy Market News. Milk supplies are steady to increasing in many parts of the country. Coupled with reduced demand from Class I and II due to the holidays, more milk is available for the vat and this is expected to be the case through early January.
New Zealand milk production is steady to slightly lower as the milk season moves further away from the peak. October output was almost 4 percent higher than a year ago. Seasonal numbers through October were up 6 percent, reports DMN, while Australian output has been growing slightly in recent weeks. November totals are about 1 percent above a year ago. Estimates of seasonal totals growing by 2 percent are expected to be lowered.
Back to the futures
First half 2013 Class III contracts portended $18.26 per hundredweight average on Dec. 7, down from $18.74 the week before, $18.47 on Dec. 14, $18.33 on Dec. 21, and was trading around $18.38 late morning Dec. 28, compared to $15.90 in 2012.