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Dairy Margins Erode in June as Milk Output Continues to Grow

by Lee Mielke

Published: Friday, July 14, 2017

The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."

Dairy margins have deteriorated since the middle of June due to a combination of lower milk prices and higher projected feed costs, according to the latest Margin Watch (MW) from Chicago-based Commodity & Ingredient Hedging LLC. But, "Despite the decrease, margins remain strong from a historical perspective, near or above the 70th percentile of the previous 10 years through first quarter 2018 and above the 80th percentile in second quarter."

"Milk prices have been pressured by continued growth in U.S. milk production, along with building stocks of dairy products, particularly cheese," the MW notes.

"On the feed side, revised corn acreage of 90.886 million was up 890,000 from the March planting intentions report and also over 1 million acres above the average estimate, as well as outside the range of pre-report expectations. June 1 corn stocks of 5.225 billion bushels were likewise higher than expected; however, bullish soybean figures combined with ongoing drought conditions in the U.S. Northern Plains that has sparked a significant wheat rally appear to be taking corn along for the ride. Revised forecasts for warmer, drier weather during the first half of July are also leading to concerns of declining crop condition ratings," the MW concludes.

USDA's latest National Milk Cost of Production report shows May's total milk production costs were up from April but below a year ago. Total feed costs averaged $10.45 per hundredweight, up 21 cents from March, unchanged from April, but 13 cents below May 2016. Purchased feed costs, at $5.58 per hundredweight, were down a dime from March, 4 cents below April and 32 cents below May 2016.

Total costs, including feed, bedding, marketing, fuel, repairs, hired labor, taxes, etc., at $21.80 per hundredweight, were up 7 cents from March, a penny above April, and 9 cents above a year ago.

Feed costs made up 47.9 percent of total costs in May, down slightly from 47.96 percent the month before but down from 48.7 percent a year ago.

GDT Auction

There were no Fourth of July fireworks at the Global Dairy Trade (GDT) auction. The weighted average for all products offered slipped .4 percent, following a .8 percent decline on June 20, ending six consecutive sessions of gain.

Skim milk powder led the declines last Tuesday, down 4.5 percent, after inching 1.4 percent higher in the June 20 event. Anhydrous milkfat followed, down 3.5 percent, after leading the gains last time with a 4.4 percent advance. Cheddar cheese was off 3.2 percent, following a drop of 3.8 percent last time and butter slipped .1 percent, after jumping 2.9 percent last time.

Buttermilk powder was up 10.8 percent, followed by whole milk powder, up 2.6 percent, after falling 3.3 percent last time.

FC Stone equated the GDT 80 percent butterfat butter price to $2.5558 per pound U.S. CME butter closed last Friday at $2.5850. GDT Cheddar cheese equated to $1.8377 per pound U.S. and compares to last Friday's CME block Cheddar at $1.5525. GDT skim milk powder averaged 94.79 cents per pound, U.S. and whole milk powder averaged $1.4112. CME Grade A nonfat dry milk price closed last Friday at 86¾ cents per pound.

Checking price, CME cash trading was mixed in the Fourth of July holiday-shortened week. The block Cheddar closed last Friday at $1.5525 per pound, up 2¾ cents on the week, first week of gain in six weeks, but 7¾ cents below a year ago, when cheese prices were inverted; barrels atop the blocks by 9 cents.

The barrels finished at $1.3750, up 2¼ cents on the week, 34½ cents below a year ago, and a still too high 17¾ cents below the blocks. Seven cars of block traded hands on the week at the CME and 19 of barrel.

Milk production has begun to taper in the Midwest, reports Dairy Market News, but cheese plants continue to take spot loads at $1 to $3 under class. Some plants are experiencing more difficulties finding milk. Cheese production continues to be strong and demand is somewhat steady. Most reports on inventories are long. The market tone remains unsettled as contacts are anxious over the CME's large barrel-block price gap, ongoing since May.

Western cheese output is strong due to higher volumes of milk available. Cheese demand from end-users/buyers is good and spot sales are light. Orders from retailers were unchanged from last week, but food services are taking in less loads. Supplies are plentiful for barrels and blocks. Exports are expected to increase due to U.S. cheese prices being so competitive internationally.

Spot butter fell to $2.5725 per pound last Thursday but closed the first Friday of July at $2.5850, down 5¾ cents on the week. It was the first loss in four weeks but still 30¼ cents above a year ago, with 27 cars exchanging hands on the week.

DMN says butter production is active and producers are storing it for upcoming upticks in demand. Retail and food service demand is meeting seasonal expectations. Butter inventories are building but producers are comfortable with current levels generally. Cream was available for butter makers, primarily due to the holiday, however, contacts expect cream to resume its recent tightness post-holiday, when other processing plants go back to regular schedules.

Cream supplies in the West are less available as seasonal demand from Class II manufacturers is active. Butter production is stable to light and stocks are steady to building. Some manufacturers are overseeing inventories steadily to confirm adequate butter supply for future demand. A handful of market participants are securing butter for current, third, and fourth quarter needs, and a number of end users are looking into available butter for 2018.

New Class of Milk

The Daily Dairy Report's Sarina Sharp wrote in the June 30 Milk Producers Council Newsletter that butter prices in Europe are "climbing relentlessly, while the government's mountain of milk powder languishes." She added, "Five provinces in Canada have voted to, once again, raise milk production quotas in order to meet butter demand with fewer imports."

"Beginning July 1, dairy producers in Prince Edward Island, New Brunswick, Nova Scotia, Quebec and Ontario will be allowed to sell 5 percent more milk than the record-breaking volumes of 2016. Like the rest of the world, Canada is already burdened with a surplus of skim milk powder (SMP), which prompted them to create a new class of milk."

"The new Class 7 milk protein price is equal to the lowest global price, crowding out imported milk proteins, including ultra-filtered milk and milk protein concentrates from the U.S." Sharp added, "This controversial change has reduced the volume of milk that manufacturers in the Midwest and Northeast can process, as they have lost a key market for filtered products."

"Canadian manufacturers are churning more butter and turning the leftovers into SMP," the DDR says. "Due to the new Class 7 rules, it is among the cheapest SMP in the world, and Canadian SMP exports have predictably swelled. This may be a violation of WTO rules, and it has attracted the ire of Canada's competitors in the dairy export arena."

And, in another global development, "U.S. dairy exports to Russia, as well as those from Canada, the European Union, Australia and Norway, will not improve," according to the July 5 DDR, as "Russia has extended its import ban until December 2018 in response to economic sanctions placed against Russia following its annexation of Crimea and actions in eastern Ukraine."

Cash Grade A nonfat dry milk finished last Friday at 86¾ cents per pound, up 2¼ cents on the week but 2¼ cents below a year ago on 22 cars sold.

May milk production totaled 17.8 billion pounds, up 1.8 percent from May 2016. USDA's latest Dairy Products report shows where that milk went.

May cheese output totaled 1.05 billion pounds, up .8 percent from April and 4 percent above May 2016. Year-to-date (YTD) cheese output stands at 5.1 billion pounds, up 2.5 percent from this time a year ago.

California produced 219.6 million pounds of that cheese, up 4.3 percent from April and 2.8 percent above a year ago. Wisconsin, at 272.1 million pounds, was down 1.3 percent from April but .2 percent above a year ago. Idaho was down 11.5 percent from April but 4 percent above a year ago. Minnesota was up 5 percent from April and 9.5 percent above a year ago. New York was up 19.9 percent from a year ago.

Italian cheese output totaled 450.5 million pounds, up .6 percent from April and 1.2 percent above a year ago, with YTD output at 2.2 billion pounds, up .8 percent.

Mozzarella, at 348.5 million pounds, was up .6 percent, with YTD at 1.7 billion pounds, down .1 percent.

Total American type cheese hit 425.3 million pounds, up .4 percent from April and 5.7 percent above a year ago. YTD totaled 2.1 billion pounds up 4.3 percent.

Cheddar output, which is what is traded at the CME, amounted to 312.7 million pounds, down 2 percent from April, but up 6.9 percent from a year ago, with YTD at 1.5 billion pounds, up 6.6 percent.

FC Stone called the increase "daunting." "The key to absorbing some of this Cheddar production lies in our ability to export cheese right now. While the June cheese export numbers were the second highest on record, up 47.6 percent from May, we need to see continued exporting over the next several months."

U.S. churns produced 163.5 million pounds of butter, up .6 percent from April but 1.5 percent below a year ago. YTD butter totaled 841 million pounds, down 1.2 percent.

California produced 45.8 million pounds of that total, down 4.6 percent from April and 7.5 percent below a year ago. New York output was up .6 percent from April but 4.8 percent below a year ago. Pennsylvania was up 8.3 percent from April and 8.6 percent above a year ago.

Yogurt output amounted to 372.7 million pounds, up 2.3 percent from a year ago, with YTD at 1.9 billion pounds, down .8 percent.

Dry whey totaled 82.8 million pounds, up .5 percent, with YTD hitting 414.4 million pounds, up 2.2 percent.

Nonfat dry milk production totaled 168 million pounds, down 2.3 percent from April but up 1.2 percent from a year ago, with YTD at 794.4 million pounds, up .6 percent. Skim milk powder totaled 51 million pounds, up 1.6 percent from April and .3 percent above a year ago. YTD output is at 249.2 million pounds, up 10.2 percent.

May nonfat dry milk stocks hit 282.3 million pounds, up 14.8 million pounds or 5.5 percent from April and 50.1 million pounds or 21.6 percent above a year ago.

Lastly, the International Dairy Foods Assn. says America's top five ice cream flavors are vanilla, chocolate, Cookies N' Cream, Mint Chocolate Chip and Chocolate Chip Cookie Dough. Happy National Ice Cream Month!

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