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Mielke: Milk prices hit peak, drop looms

Published on December 13, 2012 3:01AM

Last changed on January 10, 2013 7:50AM

Lee Mielke

Lee Mielke


For the Capital Press

Farm milk prices have peaked for 2012. The Agriculture Department announced the November federal order benchmark Class III price Wednesday at $20.83 per hundredweight, down 19 cents from October but still $1.76 above November 2011, a whopping $2.35 above California's comparable 4b cheese milk price, and the highest November price ever. It equates to about $1.79 per gallon.

The 2012 average, now at $17.33, is down a dollar from this time a year ago and compares to $14.46 in 2010 and a disastrous $11.03 in 2009. Look for a big drop ahead. The December Class III futures contract was trading late Friday morning at $18.50. January was at $17.90; February, $17.99; March, $18.22; and April at $18.32. The November Class IV price is $18.66, up 12 cents from October and 79 cents above a year ago.

The AMS-surveyed cheese price averaged $2.0146 per pound, down 3.3 cents from October. Butter averaged $1.8410, down 7.6 cents. Nonfat dry milk averaged $1.5143, up 5.1 cents, and dry whey averaged 64.8 cents up 2.8 cents.

California's November 4b cheese milk price is $18.48, down 95 cents from October but $1.29 above a year ago. That put its 2012 average at $15.47, down $1.01 from a year ago and $2.22 above 2010. The 4a butter powder price is $18.27, up 31 cents from October and 57 cents above a year ago. Its 2012 average is $15.46, down $3.56 from a year ago but 64 cents above 2010.


We mentioned the drought here a few weeks ago, something we haven't heard much about in the major press for a long time but its effect is still with us. The Nov. 30 Daily Dairy Report pointed out that the U.S. winter wheat crop is entering dormancy in the worst condition on record. DDR analyst Sarina Sharp talked about it in the Daily Dairy Discussion on the DDR website.

She reported that only 33 percent of the crop is in good or excellent shape, compared to 52 percent at this time last year. The Plains states are still struggling with severe to extreme drought, and in the driest areas, an alarming portion of the crop has not emerged. She reported that only 60 percent of South Dakota's wheat crop has emerged, compared to 100 percent a year ago. Much of the seed that has not emerged likely has blown away in the dust.

Wheat could deteriorate further under cold, dry conditions, according to Sharp. Dormant winter wheat is typically insulated from damaging cold by snow cover. But there is little moisture in the forecast, and this year the crop could be unprotected. A lack of winter moisture could extend the devastating drought into the start of the next crop year.

She said it's too early to assume this dryness will persist until spring but warned that feed prices will be highly sensitive to any indication that the Corn Belt is facing a multiyear drought. A large crop is needed to replenish stocks or end users will face another year of demand rationing and record-high grain prices.

Lingering drought could also restrict the supply and quality of forage and increase competition for limited supplies, according to Sharp, and "The quality of forage used in dairy cow rations has a significant impact on production.

"Dairy producers will likely have to pay a considerable premium for good-quality forage if drought continues, and milk production per cow could suffer.

"As the drought reduces winter pasture available for beef cattle, more cattle will be placed on feedlots and consume purchased forage. Dairy producers will be forced to compete for these supplies."

In politics

A letter was delivered to members of Congress this week from 42 organizations and 149 businesses serving farmers and rural communities that called on lawmakers to review the dairy policies that have "contributed to the financial crisis experienced by the majority of dairy farmers across the U.S."

"Federal dairy policies have been hammering dairy farmers for more than 30 years," the letter charged. "There were 600,000 U.S. dairy farms in 1976, dropping to 131,509 by 1992, and to 51,481 by 2012. It is unthinkable that Congress continues to formulate policies that will likely be responsible for a continued decline in the number of U.S. dairy farms." The letter added that the crisis affects farmers, their families, and "the entire rural economy."

The International Dairy Foods Association's Jerry Slominski told DairyLine listeners this week that processors support an extension of the current farm bill.


Dairy Profit Weekly's Dave Natzke detailed how the debate in California over the 4b pricing formula centers on the value of dry whey, which has increased in both demand and value in recent years. As a result of the current pricing formula, California dairy farmers receive substantially less than dairy farmers who market milk used for cheese through federal orders.

California is the second-leading cheese producing state, with well over 40 percent of its milk turned into cheese.

"So we're talking about a lot of milk, and a lot of money," Natzke said.

He explained that California dairy farmers contend that they should be getting a greater share of that value through the Class 4b minimum milk price paid by cheese manufacturers.

Cheese makers argue that dry whey manufacturing is a capital intensive process, and that, with California milk processing capacity already stretched to the maximum, they are unable to pass higher milk prices back to the farmers.

California Department of Food and Agriculture Secretary Karen Ross on Thursday called for a Dec. 21 hearing to consider proposed amendments to all classes of California milk, not just the Class 4b price as requested by three producer organizations on Dec. 3.

According to CDFA's hearing notice, proposed adjustments to Class 1, 2, 3, 4a and 4b prices will be considered for a period not to exceed six months and the hearing will be held at the CDFA auditorium in Sacramento, according to DPW.

Ross filed the hearing notice after denying a petition by California Dairies Inc., Dairy Farmers of America Western Area Council and Land O'Lakes Inc. requesting a hearing on changing the class 4b pricing formula.

In a letter to CDI CEO Andrei Mikhalevsky, DFA senior vice president Dennis Rodenbaugh and LOL general counsel Pete Janzen, CDFA director Kevin Masuhara denied the request, saying "the proposed modification does not effectuate the purposes of the Stabilization and Marketing Plans."

"The Department has determined that the modification of one component of one class of milk, the dry whey factor, is an inappropriate mechanism to address the financial challenges of California dairy producers for a couple of reasons.

"First, it cannot be justified due to a lack of reliable economic data that can be used to calculate this value in relation to the market. Second, there is an inequity embedded within the factor because not all cheese plants transform dry whey into a marketable dry whey product."

Milk-feed price ratio

Dairy Profit Weekly reported that a record-tying U.S. average milk price wasn't enough to drastically improve the monthly milk-feed price ratio, but November's index did represent the fifth consecutive month of small improvements, according to USDA's latest Ag Prices report.

The higher milk price, combined with slightly lower corn and soybean prices, helped push the preliminary November milk-feed price ratio to 1.79, the highest since last December. However, it remains below a year ago, and marks the 20th consecutive month below 2.0. The index is based on the current milk price in relationship to feed prices for a ration of 51 percent corn, 8 percent soybeans and 41 percent alfalfa hay. At $22.10, the preliminary November U.S. average all-milk price equals a record high set last August, according to DPW.

Average corn ($6.71 per bushel) and soybean ($13.80 per bushel) prices were the lowest in five months, but dry alfalfa hay prices ($215 per ton) returned to the 2012 high set last May. USDA says the average annual milk-feed price ratio was 1.88 in 2011 and 2.26 in 2010.


The cash cheese market was mixed the first week of December. The 40-pound blocks closed the first Friday of the month at $1.76 per pound, unchanged on the week but 10 1/2-cents above a year ago. The 500-pound barrels closed at $1.66, down 5 1/4-cents on the week, 8 3/4-cents above a year ago when they plunged 14 cents to $1.5725, but are 10 cents below the blocks. Only five cars of barrel were sold on the week. The AMS-surveyed, U.S. average block price lost 7.7 cents, hitting $1.9197, while the barrels averaged $1.8373, down 7.9 cents.

Cheese plants were busier as extra manufacturing milk was available over the Thanksgiving holiday and long weekend, according to USDA's Dairy Market News. The lower cheese prices have buyers ordering to refill store shelves after the holiday. Retail sales were reported as good. Recent price declines also helped spark interest into aging programs, according to DMN.

American-type cheese output, at 371 million was up 6.1 percent from September and 5.1 percent above a year ago. Italian type, at 388 million, was up 4.8 percent from September and 0.9 percent above a year ago. Total cheese production amounted to 928 million pounds, 6.3 percent above September output and 3.2 percent from a year ago.


Cash butter inched up a half-cent Wednesday reversing 12 consecutive sessions of loss, added another half-cent Thursday, and closed Friday at $1.59, still a penny below the previous week, the fourth week of decline, and a nickel below a year ago. Twenty cars found new homes on the week. AMS butter plunged 14.6 cents, averaging $1.7088. AMS powder averaged $1.5310, up 1.1 cent, and dry whey averaged 65.7 cents, up 0.3 cent.

Churning over the Thanksgiving holiday was seasonally strong, according to DMN, as surplus cream was plentiful. Milk handling returned to normal following the holiday and Class I orders were increased as schools and colleges resumed.

October butter production hit 46 million pounds, up 6.8 percent from September and slightly above October 2011, according to USDA's Dairy Products report. Nonfat dry milk, at 95 million pounds, was up 12.4 percent from September but 5.6 percent below a year ago.


Milk production in the Southwest is following the recent theme of incremental week-to-week increases but trailing year-ago levels. Pacific Northwest output is also below last year, attributed to fewer cows and less output per cow. Milk volumes are steady in Utah and Idaho. Seasonal milk production patterns are prevalent across the Midwest with milk component tests steady to slightly higher. Milk is being moved around to balance dairy product inventories and maximize returns. Northeast, Mid-Atlantic, and Southeast output is increasing marginally, yet trending below a year ago.

Commercial disappearance of dairy products in the first nine months of 2012 totaled 151 billion pounds, up 2.1 percent from 2011. Butter was up 3.1 percent; American cheese, up 2.2 percent; other cheese, up 2.2 percent; nonfat dry milk was up 27.9 percent; but fluid milk products were off 2.2 percent.

Jerry Dryer commented on the fluid sales in his Nov. 30 Dairy and Food Market Analyst: "Part of the decline was driven by school milk sales or more appropriately, the lack of chocolate milk sales, as many school districts banned or limited chocolate milk at the beginning of this school year. Sugar was the culprit, not the milk. Unfortunately, kids have a strong preference for chocolate."


Cooperatives Working Together accepted 10 requests for export assistance this week to sell 1.3 million pounds of cheese, 1.1 million pounds of butter, and 85,890 pounds of whole milk powder to customers in Asia and the Middle East. The product will be delivered through February and raised 2012 CWT cheese exports to 113.6 million pounds, 70.5 million of butter, 127,868 pounds of anhydrous milk fat, and 171,961 pounds of whole milk powder to 36 countries.


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