Mielke: Cash price rally surprises market

Lee Mielke

By LEE MIELKE

For the Capital Press

The Monday rally in the cash dairy prices following Thanksgiving Week caught the market by surprise, according to Stewart Peterson's Matt Mattke in Tuesday's DairyLine broadcast. Futures were factoring in anticipated further declines in cheese, he said, with some months expecting the low $1.50s.

"If buyers are going to step in, this is the time of the year where they should still be looking to do so," Mattke said. "As there's still those end users looking to procure supplies for upcoming holidays."

He wasn't convinced the rally would hold and warned that, in the past, "when October and November are strong for cheese prices, which is pretty rare, it hasn't been a good omen for cheese prices in the month of December." He added that he would not be surprised if the block-barrel average fell below November lows. In a worst case scenario, "we could see $1.60 cheese tested." He said that $1.59 to $1.77 "looks like what the downside range of risk could be."

"Stay defensive in nearby months," Mattke advised. "Look to the tools you're most comfortable with -- whether it be futures, puts or fences. Keep the protection nearby and in that first quarter time frame. Going beyond that I think it's a bit early until we see some indications that the long-term trend for the dairy market is turning to down. Right now we don't see that yet."

Boom or bust?

FC Stone dairy broker Boris Maslovsky said in the Nov. 28 eDairy Insider Opening Bell that consumer demand may support dairy prices.

"Black Friday was a blockbuster," Maslovsky said. "Sales were extremely strong, well above expectations and are driving equities up. Consumer spending for televisions and other goods may filter into food markets." However, he cautions that China's milk imports are down by as much as half, so international markets may weigh on U.S. dairy prices.

Dairy economist Bill Brooks disagreed and said heavy consumer spending on television sets doesn't translate into higher food demand.

Dairy economist Bill Brooks disagreed and said heavy consumer spending on television sets doesn't translate into higher food demand.

"I don't believe there will be a bump in dairy prices based on Black Friday," he said, but added that consumer spending "could cushion price declines."

The CME's Daily Dairy Report echoed the China concern. It reported that, in the June to October period, China imported just 150 million pounds of whole milk powder, down 45 percent from a year ago. Purchases are expected to pick up ahead of the Chinese Lunar New Year, which starts Jan. 23, according to the DDR. Whole milk powder out of Oceania is priced at $1.54-$1.70 per pound, up about 7 cents since mid-October, according to USDA's Dairy Market News.

FC Stone dairy economist Bill Brooks warned in the Dec. 1 eDairy Morning Executive Edition that the global macroeconomic picture looks weak, while milk production is up. He adds that China's economy has slowed and Europe is in trouble.

"The more support Europe gets, the less chance of the dollar soaring and limiting U.S. exports," broker Maslovsky wrote.

Slowing movement

The DDR says third quarter cheese use was slowing, based on USDA data. Disappearance of American cheese was off 4.3 percent, the worst quarter in four years, according to Editor Alan Levitt. He adds that disappearance of other cheese was up just 1.8 percent. Combined, total cheese use was down 0.6 percent from the prior year in third quarter after running nearly 5 percent higher in the first half of 2011.

Butter movement, on the other hand, remained robust in third quarter, according to Levitt. Commercial use was up 12.2 percent, "helping to clear very heavy production volumes." Disappearance was up almost 10 percent in the first three quarters of the year, according to USDA, and manufacturers were successful in moving powder in the third quarter.

Nonfat dry milk and skim milk powder use in third quarter was up about 11 percent versus a year ago, according to USDA production and inventory figures. Fluid milk sales were down 1.3 percent.

USDA's Dairy Products report indicates milk is being channeled to the churn and the dryer. October butter production hit 146 million pounds, up 6.4 percent from September and 19.6 percent above October 2010. Nonfat dry milk and skim milk powder output, at 142.7 million pounds, was up 8 percent from 2010.

Cheddar cheese output totaled 249.9 million pounds, virtually unchanged from September but 5.8 percent below a year ago. American cheese, at 352 million pounds, was up 4 percent from September and 1.2 percent below a year ago.

In export news

The Cooperatives Working Together program accepted 12 requests for export assistance this week from Dairy Farmers of America, Darigold, and United Dairymen of Arizona to sell a total of 7.4 million pounds of cheddar and Monterey Jack cheese to customers in Asia, the Middle East and Central America. CWT's 2011 cheese exports now total 88.3 million pounds.

CWT will have "a very robust future," in 2012 according to the National Milk Producers Federation's Chris Galen in Thursday's DairyLine. Participation now exceeds 70 percent of the U.S. milk supply. Created in 2003 to help dairy farmers, Galen said the decision was made two years ago to concentrate on export assistance.

The 2012 budget will be $35 million, according to Galen, with the majority going to American-type cheese, a quarter to butter and butterfat products, and $5 million held in reserve for possible inclusion of milk powders if necessary.

"CWT has had a big role the past couple years in helping augment our cheese exports," Galen said. About two-thirds of all cheddar and American-type cheese exported this year was facilitated by CWT, he said. And 18 percent of all cheese exported this year has been the result of the CWT.

"At 2 cents per hundredweight, it's a very modest investment that farmers and cooperatives are making in a program that basically helps everyone with better prices," Galen said.

The majority of Asian exports go to Japan, Galen reported. He expects exports to Korea to continue to grow with the new free trade agreement, plus a significant portion of product is going to the Middle East, including Saudi Arabia and Egypt.

"They are important export markets for the U.S. overall," he said. "And the more people participate, that will give a bigger budget to facilitate more exports."

Looking up

Milk prices could average around $20 per hundredweight for 2011, more than $3.50 higher than last year, according to Dairy Profit Weekly's Dave Natzke in Friday's DairyLine.

"However, two government reports this week, recapping dairy financial factors for October and November, indicate profit margins will be shrinking in the final quarter of the year," he said.

USDA's monthly report on milk production costs showed higher October feed prices pushed total production costs to possibly the highest level on record, even surpassing totals seen during a previous high-cost period of 2008. Based on USDA estimates, total costs covering feed and other operating costs, as well as labor and overhead, will be up at least $2 per hundredweight from 2010.

"So while 2011 milk prices will be up substantially from 2010, higher costs could eat up nearly two-thirds of that additional income," Natzke said.

"For dairy producers who buy feed, hay prices remain especially troublesome, more than $80 per ton higher than a year ago," Natzke said. "Most market analysts suggest milk prices move in a three-year cycle, and the last low point was 2009. And while 2011-12 milk prices should average well above the devastating lows of 2009, when combined with anticipated feed prices, the corresponding milk-feed price ratio could rival that seen in 2009."

Butter moves

Sellers tried to "butter up" the Chicago Mercantile Exchange the week following Thanksgiving as a possible record high 56 carloads came and went. You might say "Black Friday" for butter came on Monday when the price jumped a nickel despite 11 carloads trading hands, followed by 14 more on Tuesday, and kept coming. The first Friday of December however saw the price close at $1.63 per pound, up 2 cents on the week and 2 cents above a year ago. The NASS-surveyed price plunged 12.6, to $1.6467. NASS powder averaged $1.4094, down 4.3 cents, and dry whey inched 0.1 cent higher, to 64.29 cents per pound.

Federal order milk prices took a temporary jump. The Agriculture Department announced the November benchmark Class III price at $19.07 per hundredweight, up $1.04 from October, $3.63 above November 2010, $1.88 above California's 4b cheese milk price, and equates to about $1.64 per gallon.

It's the highest November price in four years and put the 2011 average at $18.33, up from $14.46 at this time a year ago and a disastrous $11.03 in 2009. But Class III futures late Friday morning portended a decline in December, to $18.61. Looking to First Quarter 2012; the January contract was trading at $17.29, February $17.15, March $17.09, and April $16.95.

The November Class IV price is $17.87 per hundredweight, down 54 cents from October but $4.62 above a year ago.

The NASS-surveyed cheese price averaged $1.8415 per pound, up 9.4 cents from October. Butter averaged $1.7824, down fractionally. Nonfat dry milk averaged $1.4522, down 5.9 cents, and dry whey averaged 63.8 cents, up 2.3 cents.

California's 4b cheese milk price is $17.19, up $1.41 from October, and $4.05 above a year ago. The 2011 4b average now stands at $16.48, up from $13.25 a year ago. The 4a butter-powder price is $17.70, down 59 cents from October, but $1.36 above a year ago. The 2011 average is now $19.02, up from $14.82 in 2010.

A more typical spread between block and barrel cheese was reestablished. Monday saw a small rebound in both but gave it all back with the blocks closing Friday at $1.74, down 4 3/4-cents on the week but still 23 1/4-cents above a year ago. The barrels rolled 8 3/4-cents lower, to $1.7125, and 25 1/4 above a year ago. Only five cars of block traded hands on the week and eight of barrel. The NASS U.S. average block price jumped 6 1/2-cents, to $1.8886, and the barrels averaged $1.9754, up 6.8 cents.

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