Lots of ‘bull’ in dairy markets

Lee Mielke

Cash dairy traders got the shivers or a warm heart, depending on which side of the market they’re on, from this week’s November Cold Storage report. The data showed strong seasonal drawdowns, particularly in butter stocks from October and a year ago, in fact the highest monthly butter drawdown in 20 years, according to the Daily Dairy Report.

The Nov. 30 butter inventory stood at 121.4 million pounds, according to preliminary data, down 60.4 million pounds or 33 percent from October 2013 and 5.9 million pounds or 5 percent below November 2012. Revisions added 8 million pounds to the original October 2013 estimate. The October 2013 butter inventory was originally reported to be up 20 percent from October 2012 and 19 percent above September 2012.

American type cheese, at 616.1 million pounds, was down 10.1 million pounds or 2 percent from October, but 4.4 million or 1 percent above a year ago. The total cheese inventory stood at 998.5 million pounds, down 21.2 million or 2 percent from October but 12.6 million pounds or 1 percent above November 2012.

High Ground Dairy’s Eric Meyer says butter inventories have been through a lot the past year. He reports that, between November 2012 and May 2013, butter stocks grew from 127.3 million to 322 million pounds, up 195 million pounds. This is a record, he said, both for the steepest six-month inventory build and for the most manufacturer-held stocks in a single month.

“But, thanks to a combination of a lull in prices this summer along with strong exports and weaker-than-expected milk production over the past three months, butter inventories have been decimated and have lost more than 200 million pounds since May. Cold storage warehouses cannot be happy with this reversal of fortune,” he wrote.

He adds the caveat that, “While the decline has certainly been impressive, 121.4 million pounds of butter in storage at the end of November is not historically tight. This was the first time since July ’11 that stocks declined versus the previous year but overall, November ’13 ending stocks were above 2009 and 2010 levels by 51 million and 28 million pounds, respectively.” He believes that weaker-than-anticipated milk production and U.S. competitiveness to sell into the global market will likely keep butter prices somewhat supported in the near term.”

Cheese stocks saw a fairly typical decline between October and November, according to Meyer, and “Based on the upward price trend of CME block cheese prices over the past six weeks as well as reports of strong export demand, November ending stocks can be considered slightly bearish after the wave of bullish news this market has absorbed over the past month.”

Meyer believes domestic cheese demand has “suffered from historically high prices in November and December, which caused stocks to decline a bit less than expected.” He says “mild cheddar availability has tightened as milk production in many cheese-producing regions of the U.S. remains sluggish. Based on stronger global demand for milk powders and the wide spread between Class IV and Class III milk prices, any excess milk typically available this time of year will move to the driers and not to the cheese vat.”

Dairy farmers will be seeing better bottomlines. DairyBusiness Update (DBU) reports that, on the strength of lower feed costs, the national average cost to produce milk fell for the second consecutive month, declining to its lowest level since April 2012. All cost estimates are based on total farm costs per hundredweight of milk sold.

USDA’s monthly Milk Cost of Production report showed purchased feed costs ($6.32 per cwt. of milk sold) were the primary driver, down $1.49 compared to October 2013 ($7.81), and down $1.83 per cwt. from November 2012 ($8.14).

November 2013 total feed costs ($12.55 per cwt. of milk sold) were down $1.76 per cwt. from October 2013 ($14.31), and $2.56 less than November 2012 ($15.10). Total feed represented about 51 percent of total costs in November 2013, compared to 56 percent a year ago.

Other than feed, virtually all operating and allocated overhead costs were pretty much unchanged from October 2013 and November 2012. The preliminary November 2013 average total cost was $24.50 per cwt., down $1.84 from October 2013 ($26.34) and down $2.41 per cwt. from November 2012 ($26.91).

The good news kept coming Christmas Week. Commercial disappearance of milk used in all dairy products during October totaled 18.83 billion pounds, up 4 percent from October 2012, and about 2.49 billion pounds more than total U.S. producer milk marketings for the month, according to USDA. DBU says this is possibly the highest monthly commercial disappearance on record.

Producer milk marketings for October 2013 totaled 16.34 billion pounds. Adding to available supplies, beginning commercial stocks totaled 14.33 billion pounds, and imports for the month totaled 323 million, for a total of 31.0 billion pounds.

At the end of October, ending commercial stocks totaled 12.17 billion pounds, down about 2.16 billion pounds compared to September 2013, but still about 423 million pounds more than October 2012, according to DBU.

Meanwhile, cash dairy product prices were mixed in the shortened Christmas holiday week. The 40-pound Cheddar blocks held all week at $2 per pound, up 26 cents from that week a year ago. The 500-pound barrels finished at $1.97, up 2 cents on the week and are also 26 cents above a year ago. No cheese was traded in the cash market on the week. The lagging AMS-surveyed U.S. average block price hit $1.8888 per pound, up 1.9 cents, while the barrels averaged $1.8358, down 1.6 cents.

USDA’s Dairy Market News (DMN) says buyers were looking to secure inventories for New Year’s and the football bowl and playoff season. Cheese production was being limited by tighter than expected milk supplies and competition from butter/powder plants for available milk. Block demand is good domestically and export sales continue to reduce inventories but DMN warns that higher prices are beginning to restrict some of the export demand.

Cash butter marched higher on Monday, following two sessions of gain the previous week, but surprised us with a penny and a half drop on Tuesday, following that bullish Cold Storage report. Thursday it was unchanged and dropped another 3 1/2-cents Friday to close at $1.55, down 3 1/4-cents on the week but still 5 1/4-cents above a year ago. Fourteen cars found new homes on the week. AMS butter averaged $1.6454, up 1.4 cents.

The butter market tone was steady, according to DMN, as butter makers look to obtain additional cream to replenish depleted stocks. Cream demand has held in longer than anticipated, reducing churn rates across the regions, but was expected to loosen up over the year-end holidays. Production rates for butter manufacturers are reduced throughout most of the country, following seasonal trends. Domestic demand is strong in the Northeast, but slowing in the Central and Western regions. Export interest is good and increasing as U.S. butter prices are lower than much of the international market, says DMN.

Cash Grade A nonfat dry milk closed Friday at $2.11 per pound and Extra Grade at $2.09, both unchanged on the week. AMS powder averaged $1.9625, up 1.5 cents, and dry why averaged 57.61cents per pound, up 0.2 cent.

Jerry Dryer, editor of the Dairy and Food Market Analyst, doesn’t put much stock in the drop in the cash butter price. Dryer said he doesn’t see butter “doing its typical seasonal crash,” and credits strength in butter markets in the rest of the world. He reports that “The Russians seem to have an insatiable appetite and the butter price in Europe is over $2 per pound because they’re supplying that Russian market.” He adds that they’re even here buying butter so he sees “solid footing for at least for a couple more months.”

Dryer concurs with Natzke’s view on October commercial disappearance possibly being at record levels. I asked about the questions raised over last month’s USDA commercial disappearance data and Dryer replied, “The USDA numbers are a little bit goofy on occasion. They apparently have invented some new math.”

He admits that his own tracking and numbers agree that October disappearance was very strong. He reported that almost 19 billion pounds of milk and dairy products were used on a milk equivalent basis, up about 4.6 percent from a year ago when October 2012 disappearance was up 4.3 percent from 2011.

Dryer said he “doesn’t put a whole lot of stock in the monthly numbers because there can be little glitches in the data and commercial disappearance is a residual number, but you step back and it’s still very impressive.” And, commercial disappearance was up 3.9 percent over the most recent three months, according to Dryer’s data, “so sales, dairy usage has been very strong.”

When asked what this means for prices and how long we’ll see $2 cheese, Dryer answered, “I can’t answer the $2 cheese number but I can tell you that I think prices are going to remain elevated, well above historic levels, well into the First Quarter, maybe all the way through the First Quarter driven by strong commercial disappearance, which includes both good sales here in the U.S. and very very strong exports.”

Milk production across the U.S. is moving off seasonal lows, reports USDA. Much of the country is seeing some increased flow. Eastern, Southern and Midwest levels are slowly increasing, while the Northwest remains flat. California is improving, but increases are said to be lower and later than comparable years.

Good Class I demand in anticipation for holiday needs was restricting milk to manufacturing plants. School closings for the holidays was expected to free up some increased supplies. The midweek holiday should not cause much of an interruption for milk handlers, according to DMN, and problems were not expected with moving milk to manufacturers.

DMN also reports that Australian milk production continues along the usual seasonal decline. Good weather, along with good producer margins and favorable water storage, should boost end of season milk production. There is general consensus that Australia’s seasonal output will be down 1-2 percent from a year ago. New Zealand milk production in October was reported by the Dairy Companies Association of New Zealand at 3,157,000 tons, up 5.4 percent from October last year and 9.2 percent higher than two years ago.

The First Quarter 2014 pack average was at $16.99 per cwt. on Nov. 1, $17.33 on Nov. 29, $18.08 on Dec. 13, $19.17 on Dec. 20, and was hovering around $18.97 late morning Dec. 27. Second quarter 2014 averaged $16.89 on Nov. 29, $18.08, $17.52 on Dec. 13, $18.19 on Dec. 20, and was hovering around $18.04 late morning Dec. 27.

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