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Dairyline: Milk prices go up, but for how long?

Published on March 24, 2011 3:01AM

Last changed on April 21, 2011 5:39AM

Lee Mielke

Lee Mielke


For the Capital Press

Consumers will be seeing higher milk and dairy prices. How much remains to be seen as dairy product prices, particularly cheese, took a hit the middle week of March.

The Agriculture Department announced the April federal order Class I base milk price March 18 at $19.43 per hundredweight, up $1.20 from March and a whopping $6.21 above April 2010. That amounts to about $1.67 per gallon for soccer moms. Compare that with what you're paying at retail.

The Class III advanced pricing factor became the "higher of" in driving the Class I value for the first time since March 2010 and the National Milk Producers Federation's Roger Cryan does not expect a MILC payment for producers.

The NASS butter price averaged $2.0363 per pound, down 4.6 cents from March. Nonfat dry milk averaged $1.4733, up 12.7 cents. Dry whey averaged 46.18 cents, up 4.7 cents, and cheese averaged $1.9735, up 33 1/2-cents.

Cheese prices plummet

Monday morning's tremor was in Chicago and not Japan as cheese prices plummeted at the Chicago Mercantile Exchange. The blocks lost 13 1/2 cents, the barrels were down a nickel and a quarter, and the free fall continued from there as the markets awaited Friday afternoon's February milk production data.

The blocks finished Friday at $1.6850 per pound, down 33 cents on the week, but still 41 1/2-cents above a year ago. Barrel finished at $1.70, down 26 1/2-cents on the week, and 43 1/2-cents above a year ago. Generally, a penny movement on cheese represents a dime on the milk price.

Twenty-three cars of block traded hands on the week and 16 of barrel. The lagging NASS-surveyed U.S. average block price hit $1.9842, up 4.1 cents, while the barrels averaged $1.9733, up 3.5 cents.

Even the butter price lost ground, closing Friday at $2.07 per pound, down a nickel on the week, but still 60 cents above a year ago. Eleven cars were sold on the week. NASS butter averaged $2.0671, up 5.6 cents.

Cash Grade A nonfat dry milk closed Friday at $1.79 and Extra Grade closed at $1.80, both were unchanged on the week. NASS powder averaged $1.4766, up 0.6 cent. Dry whey averaged 46.28 cents, up 0.6 cent.

Downes-O'Neill dairy economist Bill Brooks said that it's been a long time since we've had that steep of a decline in the block (cheese) market and, after the previous Friday's market saw the blocks inch up a quarter-cent and the barrels hold, there might have been a feeling of stability.

"That didn't last," said Brooks, "And right now is not the time of year we typically are going to see prices moving higher."

He also pointed to the inverted spread with the barrels over the blocks, saying there may be more support in the barrel market as traders anticipate May, the start of the barbecue and travel season, although he believes it will be more barbecue than travel, considering gas prices.

How low will the blocks go? Brooks suggests the $1.50s. He doesn't think they'll fall to the $1.30s seen in December and early January but admits he didn't think they would get that low then, either. There's uncertainty where the markets are going to be, according to Brooks, but he thinks there'll be support in the $1.50s.

Monday's powder prices were unchanged and butter remained at $2.12 but Brooks said the markets were probably waiting on Fonterra's bi-monthly dairy trade auction on Tuesday. There's a lot of world uncertainty, he said, over the Middle East and the earthquake in Japan and how they will impact that auction.

The next day the CME's Daily Dairy Report stated that the weighted average whole milk powder price fell 11.4 percent from the March 1 auction, the first decrease in four months, and the skim milk price was down 4.6 percent.

Regarding butter, Brooks said we're a little over a month away from Easter so there's probably some stock piling going on although, given current price levels, there's probably not a great deal.

When asked if he expects any impact on the dairy markets from the earthquake in Japan, Brooks said yes. Japan was an importer of cheese, he explained and, "with the destruction that has taken place and the loss of life, imports are likely to slow down so that product that might be slated to move into that country over the next month or two probably won't and it will be looking for a home out there so that could very well place pressure on cheese market especially."

Quake could impact dairy

The events in Japan were part of the discussion this week in Madison at the annual business conference of the Professional Dairy Producers of Wisconsin. Dairy Profit Weekly editor Dave Natzke was there and reported that Virginia Tech emeritus agricultural economist David Kohl warned PDPW members the ongoing crisis in Japan could impact U.S. dairy producers on multiple fronts.

Commodity markets are being driven both by supply-demand issues and confidence in financial markets, Natzke warned.

"Corn and soybean futures prices are moving up and down based on how effective the markets feel Japan is at containing fallout from failing nuclear reactors," according to Kohl.

"And, as we saw earlier this week in Fonterra's Global Dairy Trade auction, the uncertainty in financial markets has already driven down milk powder prices, with prices down 1013 percent from two weeks ago," Natzke said.

Kohl predicted that, while the price decline in feed commodities is welcomed by farmers buying feed, both grain and dairy markets will likely become even more volatile, making the timing of purchasing and selling decisions critical.

The impact could reach beyond commodity prices to credit availability and interest rates, according to Kohl, because, while most news reports cite China's control of large shares of U.S. debt, Japan is actually the biggest lender to the U.S. As Japan struggles to recover to rebuild its infrastructure, less money will be available on the world credit market, causing interest rates to rise, Kohl said.

Closer to home, Kohl warned the U.S. economy is not "out of the woods," noting housing, unemployment and government debt are "headwinds." He warned that $4 per gallon gasoline prices have both a financial and psychological impact on consumers, causing them to pull back on purchasing plans.

Using a football analogy, Kohl urged dairy producers to "play offense by managing their revenues; defense, by managing their input costs; and special teams, by managing credit and interest rates."

Milk production heading up

The Agriculture Department's Livestock, Dairy and Poultry Outlook says milk production is forecast to expand this year as the number of cows increases; milk per cow is also forecast to increase, albeit at a slower pace in 2011.

High feed prices and softening milk prices may ultimately blunt the expansion in cow numbers, according to the Outlook, but through the first part of the year, strong export demand for all products and recovering domestic demand has supported milk prices, trumping higher feed prices for most producers.

Corn prices in 2010-11 are expected to be high by historic standards, averaging $5.15-$5.65 per bushel for the crop year. USDA did not revise the corn supply, demand and price forecast this month. The soybean meal price is forecast to average $340-$370 a ton in 2010-11 and this month's forecast was revised downward slightly. Feed ingredient prices could push the 16 percent mixed ration value up by more than $2 per cwt. from the $7.25 calculated for 2010.

Milk yield per cow rose by nearly 2.8 percent in 2010 and is forecast to climb by only slightly more than 1 percent in 2011, a rate much closer to long-term trend. Downward revisions in output per cow in late 2010 and slower than expected growth in January contribute to the forecast. Along with this, dairy cow slaughter has been trending upward since last fall, based on year-earlier comparisons.

The higher implied culling, along with an ample supply of dairy heifers, suggests that herd freshening may be underlying the expansion, and the introduction of a greater number of heifers could also slow the growth rate in milk per cow in 2011 as the younger cows typically will not hit their production stride in the first lactation, according to USDA.

Dairy imports down

NMPF's Jim Tillison said imports of dairy products that Import Watch tracks were down in 2010 and some were down significantly.

While milk protein concentrate imports were up slightly, total milk protein imports were down from the previous year and down pretty significantly from others years. MPC imports were down an average of 2 percent and total protein imports were down 19 percent when compared to the previous four years. Cheese imports were down as well, he said.

Two messages come out of the data, according to Tillison. First is the recovery in milk production in the U.S. making these products available domestically, plus the demand for dairy products overseas has grown dramatically so less product is available to come to the U.S. Another important factor is that U.S. exports of dairy products increased in 2010 and will continue to increase in 2011.

Milk protein imports, including casein and MPC are down, according to Tillison. He points to strong overseas demand and more MPC is being produced here from U.S. milk and used domestically which is positive for U.S. dairy farmers.

CWT accepts export requests

The Cooperative Working Together program accepted 12 requests for export assistance from DFA, Darigold, and Foremost Farms to sell a total of 2.9 million pounds of cheese abroad this week. Details are posted at www.dairyline.com. National Milk also praised the long awaited arrival of the promotion checkoff on dairy imports. USDA finalized its regulation Friday.

Last week, you'll recall that we promoted a "webinar" scheduled for Thursday and Friday, sponsored by the Dairy Calf Heifer Association and the Beef Quality Assurance Center which is funded in part by the Beef Checkoff.

The webinar featured Mike Apley, of Kansas State University, one of the world's foremost experts on antibiotic use in cattle. Apley reported that he talked about one of the problems which has been around for some time and that is farmers using Oxytetracycline and Neomycin in milk replacer, forgetting that these calves are going to go to slaughter as bob veal. There is not an adequate withdrawal time given, he said.

Another issue is extra label use of antibiotics such as Gentamicin which has a very long withdrawal time -- 18 months, he said -- and "that certainly isn't going to work with a calf that's 150 days of age or less."

He also pointed out that "it's pretty straightforward how to avoid residues." He said you have to be sure of what you are using because a common theme among violations is that no veterinarian is involved and he warned that, "if you're using drugs off label, by law, a veterinarian has to be involved and the veterinarian is responsible for ensuring proper withdrawal times are assigned."

"We have to have treatment protocols," Apley said. "We have to have them where they're able to be read and understood by everyone who is treating these animals, and we need to have follow up. We need to see how those protocols work, and how well we're adhering to those withdrawal times so it's about records, veterinarian involvement, attention to detail, and follow up on those records."

Last, but definitely not least, he concluded, is to assure that we have the animals adequately identified so proper withdrawal times can be applied.

Partnerships benefit industry

Loganville, Wis., dairy producer Randy Roecker talked about the dairy checkoff's "powerful partnerships" at the recent World Ag Expo in Tulare, Calif.

Roecker was appointed to the National Dairy Board in 2006 and called it a great experience, with one of the highlights being a trade mission to China to see how dairy products are used there. He said he gets to know firsthand about the partnerships the dairy checkoff has put together and says they're powerful because the partners have the money to stick into the various promotions. The checkoff puts in a little money, he said, and they put in a lot.

One example is Domino's "Smart Slice" pizza which was developed with assistance from the dairy checkoff to meet stringent dietary guidelines in schools and has worked out very well.

Another partnership is with McDonalds, specifically the Frappe and Smoothie line this past summer. Millions of pounds of milk are used in these products, he said, "So it's truly a success story for the dairy checkoff and dairy farmers."

McDonalds Angus Snackwrap was another partnered project, he said, and uses a whole piece of cheese instead of the half-slice used in the Big Mac Snackwrap. Starbuck's Vivitano is another example, Roecker concluded.


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