Mielke: Farmers get IRS break as drought spurs culls
By LEE MIELKE
For the Capital Press
News reports of drought have quieted down but not the consequences. Dairy Profit Weekly's Dave Natzke talked about it in Friday's DairyLine, reporting that higher feed and fuel prices pushed U.S. dairy farmers' average milk production costs to another record high in August.
USDA economists said total production costs per hundredweight of milk sold were up about 4 percent from July and up 17 percent from August a year ago, with feed prices making up a bulk of the increase. Through the first eight months of 2012, average costs are up about 9 percent from the same period last year.
"The higher costs are impacting dairy cow culling, but the numbers are a bit deceiving," Natzke warned. "USDA announced more than 2 million cows had been sent to slaughter through the first eight months of 2012, or about 128,000 more than a year earlier. However, during the same period, the U.S. milking herd declined by just 22,000 cows, an indication a large number of replacement heifers became milk producers."
Dairy farmers who were forced to sell cattle due to drought are getting a break from the Internal Revenue Service, he said. The IRS announced it will extend the period in which producers forced to sell cattle due to the drought can defer taxes on those sales in counties listed as suffering from extreme or severe drought by the National Drought Mitigation Center.
"While dairy farmers are keenly aware of the impact of higher feed prices," Natzke said, "consumers will feel it in 2013."
Researchers with Rabobank, the world's largest bank, warn that skyrocketing agricultural commodity prices are causing the world to re-enter a period of "agflation," with food prices forecast to reach record highs well into 2013, rise as much as 15 percent by next June. Rabobank also published a new report looking at the global dairy industry in the third quarter of 2012, predicting "renewed supply scarcity" in the next year.
USDA's latest milk-feed price ratio confirms that margins are improving, reports the Sept. 27 Daily Dairy Report. USDA estimates September 2012's milk-feed price ratio at 1.46, up from August's near record low of 1.36. The milk-feed price ratio represents the pounds of 16 percent mixed dairy feed equal in value to 1 pound of milk at test. In general, a milk-feed ratio less than 2 indicates financial stress for dairy farms. The last time the ratio exceeded 2 was in March 2011, according to the DDR.
The preliminary September all-milk price was $19.10 per hundredweight, up $1 from last month but $2 below a year ago.
The September national average corn price of $7.35 per bushel was down from $7.63 in August but up from $6.38 a year ago. The preliminary September average price for soybeans is $16.30 per bushel, up from $16.20 in August and $12.20 a year ago. Baled alfalfa averaged $205 per ton, up from $203 in August and $198 a year ago.
Checking the cupboard
The Agriculture Department's latest Cold Storage report show dairy product stocks are dropping seasonally but at a faster-than-average rate. August butter stocks totaled 204.5 million pounds, according to preliminary data, down 13 percent from July, but were 23 percent more than August 2011.
American cheese, at 615.1 million pounds, was down 3 percent from July and 5 percent below a year ago. The total cheese inventory came to just over 1 billion pounds, down 4 percent from July and 6 percent below those year ago.
The DDR's Mary Ledman said in her website's Daily Dairy Discussion that the Cold Storage data and the latest Livestock Slaughter report were "fairly favorable" for the dairy markets, in particular cheese. August saw the strongest cheese drawdown since 2006, according to Ledman, who reminded us these stocks are expected to be held more than 30 days so none of the 615 million pounds is eligible to be sold on the Chicago Mercantile Exchange.
"It's still an indicator of supply and demand and is bullish or at least supportive to the current cheese market," she said."If people really thought this market was tight they wouldn't have brought as much product to the market."
Butter is a different situation, she said, and saw a stronger drawdown than last year by 7.8 million pounds but butter stocks are at the highest August level since 2009 and the market at that time was trading at about $1.20.
The following year we hit $2 a pound, she said, so she thinks end users learned their lesson, "when the butter market gets low they buy in and I think that's been supportive of the market although today's butter market at $1.89 is a fairly stout price level given the stocks situation." It closed Sept. 28 at $1.95.
Commenting on the slaughter data, Ledman said the report shows culling remains strong, but much of the increased culling is occurring in the Western states like California, New Mexico, and Texas. Contrast that to regions like Minnesota, Wisconsin, Michigan, Illinois, Indiana, and Ohio, where slaughter numbers were actually down 44,000 from a year ago. She believes that will change as inventories dwindle and feed costs continue to rise.
Cheese prices ended September at $2.0750 per pound for the blocks, up 7 1/2-cents on the week and 35 1/2-cents above a year ago. The barrels finished at $2.0350, also up 7 1/2-cents on the week and 39 1/2-cents above a year ago. Fourteen cars of block traded hands on the week and only one of barrel. The AMS-surveyed U.S. average block price slipped another 0.3 cent, to $1.8484, while the barrels averaged $1.8271, up 0.8 cent.
Jerry Dryer wrote in his Sept. 21 Dairy and Food Market Analyst that his long-range forecast has cash cheese at or above current levels through April of next year.
"Higher weekly average prices have customers placing orders today and this makes current cheese just that much tighter," Dryer wrote. "Longer term, Mother Nature has already done her handiwork to assure tight supplies."
Cheese production schedules are constrained by tight milk supplies and higher costs for many milk solids, according to Dairy Market News. Demand for cheese increased as additional buyers looked to fill holiday needs before any anticipated price increases. Retail and food service sales are good.
Sales are being assisted by the Cooperatives Working Together program, which accepted 13 requests for export assistance this week to sell 5.88 million pounds of cheese and 687,842 pounds of butter, to customers in Asia, Central America, Europe and the Middle East. The product will be delivered through March and raised CWT's 2012 cheese sales to 91.6 million pounds plus 58.1 million of butter and 123,459 pounds of anhydrous milk fat to 34 countries.
Cash butter added 6 cents this week, closing Friday and September at $1.95, up 19 cents from a year ago and 9 cents on the month. Eight cars were sold on the week. AMS butter averaged $1.8436, down 1.3 cents.
Churning schedules are seasonally active. Cream supplies are generally more available as Class II needs have eased and standardized cream volumes increase. Current retail orders are seasonally strong and good orders are being placed.
The Foreign Agricultural Service reports that quota imports of butter January to August totaled 4.90 million pounds, down 1.3 percent from the same period in 2011. These imports accounted for 31.9 percent of the total quota for 2012.
Cash Grade A nonfat dry milk lost 3 cents this week, closing at $1.66, while Extra Grade held all week at $1.6350. AMS powder averaged $1.3943, up 1.3 cents, and dry whey averaged 59.3 cents per pound, up 0.8 cent.
Milk production is "transitional across the country," according to USDA. Southern and Southwestern areas note milk production has crossed the threshold into a new production season. Production in other areas is drawing close to the seasonal low point.
Fluid demand moved higher the week of Sept. 17. A few handlers indicated spot loads were difficult to find. Supplies of manufacturing milk are light thus plants across the country indicate they are operating well below capacity.
U.S. fluid milk sales in July were estimated at 4.1 billion pounds, down 1.4 percent from July 2011, according to USDA, and after adjusting for calendar composition, sales were down 1.8 percent.
Back to the futures
The last half 2012 federal order Class III milk prices were averaging $16.53 on June 8, $17.49 on July 6, and $18.80 on Aug. 3. Looking at the announced Class IIIs plus the remaining four months of 2012, it averaged $18.69 on Sept. 7, $18.98 on Sept. 14, $19.13 on Sept. 21, and was trading around $19.15 late morning Sept. 28.
Dairy Profit Weekly reports that President Barack Obama and Republican nominee Mitt Romney recently spelled out their positions on agriculture issues for the American Farm Bureau Federation. In a questionnaire, both candidates went into detail about their positions on energy, environmental regulations, farm labor and more and both supported a strong U.S. renewable energy program and maintaining the Renewable Fuel Standard.
When asked why farmers should vote for them, Obama said he is committed to strengthening rural America through growing products that the world wants to buy and restoring middle class values of hard work and play.
Romney said if he were elected, he would give farmers relief from hefty environmental regulations, as well as "a common sense energy policy that develops our resources right here at home; a renewed focus on opening new markets; and a progrowth tax policy that encourages investment and recognizes that death should not be a taxable event."
Planning for disaster
USDA recently added business continuity as an objective of emergency preparedness planning, in cooperation with Dairy Management Incorporated.
"Should the U.S. ever face an outbreak of foot-and-mouth disease, government and industry coordination will be critical to keeping milk moving and dairy cases stocked," according to a press release. "With respect to dairy, the goal of business continuity is to ensure milk can continue to move from farm to market, even as we work to contain and eradicate the disease."
The Secure Milk Supply Project works toward those goals, according to DMI, and involves multiple stakeholders, including state and federal animal health officials, academic institutions, dairy producers and food companies, and industry organizations. Details are posted at www.dairyresponse.com