The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
The 2017 milk production forecast was lowered for the fifth month in a row by the Agriculture Department's World Agricultural Supply and Demand estimates report issued Aug. 10. The 2018 output was also reduced as "slow growth in milk per cow more than offset in-creases in dairy cow numbers."
Production and marketings for 2017 were projected at 215.7 and 214.7 billion pounds, respectively, down 600 million pounds from last month. If realized, 2017 production would still be up 3.3 billion pounds, or 1.6 percent, from 2016.
Production and mar-ketings for 2018 were projected at 220.3 and 219.3 billion pounds, respectively, down 900 million pounds from last month. If realized, 2018 production would be up 4.6 billion pounds, or 2.1 percent, from 2017.
Fat basis 2017 exports were raised due to higher butter and anhydrous milk fat shipments while imports were unchanged. The skim-solid basis export forecast was lowered on weak-er than expected whey sales and the import forecast was unchanged.
Fat basis 2018 exports were raised on stronger shipments of a number of dairy products. Fat basis imports were lowered slightly. Skim-solid basis exports were raised on expected stronger sales of nonfat dry milk (NDM) and other dairy products while imports were unchanged from last month.
Butter and cheese price forecasts were raised for 2017 and 2018 as demand strength is expected to carry into 2018. The 2017 and 2018 NDM and whey price forecasts were reduced based on anticipated weak de-mand.
The 2017 Class III milk price average forecast was unchanged at around $16 per hun-dredweight, up from $14.87 in 2016 and $15.80 in 2015. The 2018 average was projected at about $16.80, down from the $16.95 expected a month ago, due to lower expected whey prices more than offsetting higher cheese prices.
The Class IV milk price forecasts for 2017 and 2018 were raised as stronger forecast butter prices more than offset lower NDM prices. Look for a 2017 average of about $15.90 per hundredweight, up a nickel from last month's estimate, and compares to $13.77 in 2016 and $14.35 in 2015. The 2018 average was put at $16.25, unchanged from last month's es-timate.
Switching to feed, this month's 2017-18 U.S. corn outlook is for lower supplies, reduced feed and residual use and exports, and a decline in ending stocks. The WASDE forecasts corn production at 14.2 billion bushels, down 102 million from the July projection. The season's first survey-based corn yield forecast, at 169.5 bushels per acre, is 1.2 bushels lower than last month's trend-based projection.
Soybean production was forecast at 4.38 billion bushels, up 121 mil-lion on higher yields. Harvested area was forecast at 88.7 million acres, unchanged from July. The first survey-based soybean yield forecast of 49.4 bushels per acre is 1.4 bushels above last month but 2.7 below last year's record. With higher production and lower beginning stocks, soybean supplies for 2017-18 were projected at 4.78 billion bushels, up 2 percent from last month.
The U.S. sea-son-average soybean price for 2017-18 is forecast at $8.45 to $10.15 per bushel, down 10 cents at the midpoint. The soybean meal price forecast of $295 to $335 per short ton is down $5 at the mid-point.
FC Stone says, "The corn market was caught off-guard as the USDA posted their yield estimate well above trade expectations. The market had anticipated the weather issues in the Western Corn Belt to have had a depressing effect on the yield projection." The forecasted soy-bean crop yield was also well above trade estimates, according to FC Stone.
The first survey of 2017 cotton crop production indicates a crop of 20.5 million bales, 1.5 million above last month and the largest production in 11 years. The larger crop is partially offset by lower beginning stocks which were reduced 400,000 bales to 2.8 million due to an increase in final 2016-17 exports. Ending stocks, now projected at 5.8 million bales, would be the largest since 2008-09.
Cash dairy product prices saw ups and downs the second week of August. Cheddar block cheese finished at $1.7425 per pound, up 4½ cents on the week but 3¾ cents below a year ago. The barrels marched to $1.5925 last Wednesday, narrowing the spread to 8¾ cents, but closed last Friday at $1.5875, up 5¾ cents on the week, 27¾ cents below a year ago, and 15½ cents below the blocks. Four cars of block traded hands on the week and 19 of barrel.
FC Stone's Dave Kurzawski wrote in his Aug. 10 Early Morning Update that "the fundamental picture hasn't changed very much over the last few weeks, but there are some things ahead that could keep this market choppy. Seasonally, demand will be picking up for both cheese and dry whey. Cheese will be driven by football season then dovetailing into the holidays, while whey demand is driven by demand starting with Halloween for candy and then baked goods later."
"One must also keep in mind that, historically, supplies of American cheese typically bottom out in September and the need for fresh barrels to mix with old product that has been in storage this year could provide a bit of a boost in barrel prices, in the near term." But he warns, "Some of these bullish arguments can be mitigated by current American stocks, which are 7 percent higher than the previous year and 116.1 million pounds higher than the 5-year average."
Dairy Market News says, "Milk continues to be somewhat available for cheese production in the Midwest. Some produc-ers report being open to taking on more spot milk than is available. Some milk suppliers have limited spot sales for cheesemakers, as suppliers are beginning to move milk into other regions where schools are commencing sooner. Spot milk prices were reported from flat market to $1.50 under Class. Mid-west cheese production is steady."
"Food service orders continue to keep some plants running active schedules. Retail demand, overall, is slow to steady. Some producers report simi-lar numbers to last year, whereas others are experiencing a bit lighter demand."
Cheese output in the West is ongoing as farm milk output is "readily available and the market undertone is slow. A few contacts report that inventories for retail and commodity cheese are balanced. Howev-er, some manufacturers report long stocks. Although domestic sales seem to be strong, they are not enough to offset current production. Export opportunities are currently low," said DMN.
Cash butter saw a meltdown to $2.65 per pound by last Wednesday, but it regained 3¼ cents last Friday to close at $2.6825, down 4¾ cents on the week but 43¼ cents above a year ago, with 24 cars exchanging hands on the week.
U.S. butter exports exceeded imports by 1.2 million pounds, thanks in large part to Canada. This is the first positive monthly trade balance since January 2015, according to the Daily Dairy Report (DDR), but the DDR adds, "Earlier this year, Canada reclassified milk proteins so that milk protein concentrates, skim milk powder (SMP), and whole milk powder (WMP) would be priced on par with the lowest values reported in Oceania, the United States and the European Union. This makes Canadian SMP exceedingly competitive in the international market, and exports are responding accordingly," the DDR charged, and "In June, Canada sent a record-breaking 24.2 million pounds of SMP abroad."
Canada also raised its milk production quota by 5 percent this year to encourage greater domestic butter produc-tion, but the DDR speculates that will likely result in even greater volumes of SMP to "dump on someone else's shores. Meanwhile, the rest of Canada's dairy industry remains heavily for-tified against outside competition via its protectionist supply management sys-tem."
DMN says butter contacts continue to report strong orders. "Food service demand continues at steady to strengthening levels and retail demand has consistently improved from last year's sales. Bulk butter production is active, as cream is still flowing into Class IV pro-cessing at relatively reasonable prices."
"Western butter makers are not having any particular trouble getting cream," according to DMN, but some processors are "hesitant to take on extra cream unless needed to fulfill a confirmed sale." "With higher values of butterfat, the manufacturers do not want to put those pricey milkfats into storage as bulk butter. A number of butter makers are choosing to sell the cream rather than churn. Inventories are a little heavy but they are being drawn down by current demand."
Cash Grade A nonfat dry milk closed the second Friday of August at 85 cents per pound, down 1¼ cents on the week but 1¾ cents above a year ago. Fourteen cars were traded on the week at the market of last resort.
A new radio network dedicated to the dairy industry got underway on July 31. Dairy Radio Now (DRN) is hosted by Bill Baker, former host of the DairyLine Radio Network, of which I had the privilege of starting in 1988.
Two voices from the past aired on the Aug. 7 broadcast, my own and Jerry Dryer, editor and analyst with the Dairy and Food Market Analyst newsletter. I ask him what happened in the Aug. 1 Global Dairy Trade auction, where the overall weighted average fell 1.6 percent while butter and cheese fell almost 5 percent. CME prices moved higher, then re-lapsed.
"One auction does not make a trend," Dryer answered, and with the CME, "One week does not make a trend. The market is trying to sort itself out. It doesn't want to go higher, doesn't want to go lower." But he added that all of the signals he's seeing suggest that "the longer term trend is for this market to push higher."
Milk sup-plies are relatively tight around the world, he said, inventories, except for those in the U.S., are "fairly snug, and the Chinese are back buying, and the market is just trying to figure that out."
When asked if we'll see $3 butter, he answered "Yes, not as a $3 monthly average, but we'll see some $3 butter this fall." He looks for cheese to approach $2 per pound, especially if butter would sustain a $3 level for any length of time.
His biggest concern is that we "do something goofy in this country and screw up our trade relations with some of our key partners. Exports are a very big part of the U.S. dairy market now," he conclud-ed, "and a very big driver of prices."
Speaking of the world market, FC Stone's Dave Kurzawski wrote in his Aug. 8 Insider Opening Bell, "Combining the Eurostat June collection numbers available to date with our estimate for German milk collections gives us milk production numbers for 20 of the European Union-28 milk producers who accounted for 86.4 percent of the total EU milk collections in June 2016.
Collections for these 20 countries is now estimat-ed at 11.55 million tons, up 1.4 percent on the volume collected by the same 20 countries in June 2016, and up 1.8 percent on the 3-year average and 4.8 percent ahead of the 5-year average for June. June collection data for the remaining countries is expected to be released in the next week or so."
The USDA's latest National Milk Cost of Production report shows June's total milk production costs were up from May but still below a year ago. Total feed costs averaged $10.44 per hundredweight, down a penny from April, unchanged from May, and 35 cents below June 2016. Purchased feed costs, at $5.59 per hundredweight, were down 3 cents from April, 2 cents above May, but 64 cents below June 2016.
Total costs, including feed, bedding, marketing, fuel, re-pairs, hired labor, taxes, etc., at $21.96 per hundredweight, were up 17 cents from April and May but 13 cents below a year ago.
Feed costs made up 47.5 percent of total costs in June, down slight-ly from 47.9 percent the month before and down from 48.9 percent a year ago.