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No Good News from the Groundhog, or from USDA's Ag Prices Report

by Lee Mielke

Published: Friday, February 9, 2018

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

The first benchmark milk price of 2018 is not good news for dairy producers and, hopefully, not a Punxsutawney Phil type prediction of "six more weeks of winter." The Class III fell to $14 per hundred-weight, down $1.44 from December 2017 and $2.77 below January 2017, lowest Class III price since June 2016. The Class III price equates to $1.20 per gallon, down from $1.33 in December and $1.44 a year ago.

Last Friday morning Class III futures portended a February price at $13.58; March, $13.61; and April at $13.81; with a peak at only $15.78 in October.

The January Class IV milk price is $13.13 per hundredweight, down 38 cents from December, $3.06 below a year ago, and the lowest Class IV since May 2016.

A drop in the U.S. all-milk price average, plus higher corn and soybean prices, served to pull the December milk-feed price ratio sharply lower. The Agriculture Department's Ag Prices report shows the December ratio at 2.38 down from 2.54 in November and 2.73 in December 2016.

The U.S. all-milk price averaged $17.20 per hundredweight, down 90 cents from November and $1.70 below December 2016. California showed the bottom price, at $15.73 per hundredweight, down $1.22 from November and $1.82 below a year ago. Michigan and Arizona didn't fare much better, at $16. Wisconsin averaged $17.80, down $1.20 from November and $1.90 below a year ago.

December corn averaged $3.23 per bushel, up 8 cents from November but 9 cents below December 2016. Soybeans averaged $9.30 per bushel, up 8 cents from November but 34 cents per bushel below a year ago. Alfalfa hay averaged $148 per ton, unchanged from November, but $21 per ton above a year ago.

The December cull price for beef and dairy combined averaged $62 per hundredweight, down $1.40 from November, after dropping $2 the previous month. That's also 90 cents above December 2016 and $9.60 below the 2011 base average of $71.60.

The January price received for milk cows averaged $1,520 per head, down $90 from October 2017 and $100 per head below January 2017. Wisconsin cows averaged $1,470 per head, down $140 from October and $260 below January 2017. California averaged $1,500 per head, down $100 from October and $100 below January 2016.

National Milk's and Dairy Management Inc's. January Dairy Market Report states that the USDA estimates the U.S. all-milk price averaged $17.65 per hundredweight in 2017, $4.85 higher than the 2009 average but $6.35 below 2014. It was also the third year in a row to average less than $18 per hundredweight—first time that's happened since 2006, when feed costs began to rise, according to the report.

"Taking into account the effects of such costs, the current Margin Protection Program (MPP) margin calculation should average about $9.70 in 2017, which would be the second-highest annual MPP margin over the past 10 years," the report said. "It would be $3.60 below the highest, during 2014, and $5.12 above the lowest, during 2009. Monthly milk prices and margins both improved fairly steadily since last April, but federal order prices took a sharp drop at the end of the year, presaging a likely more difficult year ahead in 2018," the report warns.

Cash dairy prices saw little change the week of Jan. 29, as traders absorbed the Dairy Products report. Block Cheddar closed last Friday at $1.4625 per pound, down a penny on the week and 27¾ cents below a year ago. The barrels finished a half-cent higher at $1.3250, 38¼ cents below a year ago and 13¾ cents below the blocks. Three cars of block traded hands and 25 of barrel.

Dairy Market News reports that cheese production in the Midwest varies by plant, but cheese sales are "generally meeting expectations." Process cheese makers, in particular, suggest that sales have increased from a very slow start in 2018. Pizza cheese suppliers also report a demand uptick. But milk into cheese, for the most part, is discounted, with prices ranging $3 under to $1 over class. It adds, "There is some positivity regarding market tones among contacts. Although the path to some steadiness has not been cogent, there is currently a bullish sentiment as prices are appealing to buyers who have, until recently, been very hesitant to purchase more than absolutely necessary."

Western cheese makers continue to push milk through cheese vats. With ample milk supplies, cheese production is active and many facilities are running at or near capacity. Some Class II manufacturers have pulled a little more milk into their facilities, helping ease the pressure. Contacts report an increase in demand from both export and domestic markets, possibly due to lower prices. "Whether due to more favorable prices or the Super Bowl surge, manufacturers note an increase in buyer activity," said DMN. "Inventories are still heavy but the uptick has drawn total stocks down slightly."

Cash butter closed last Friday at $2.1150 per pound, down 1½ cents on the week and 4¼ cents below a year ago, with 9 cars exchanging hands on the week.

Butter sales are seasonally quiet, according to DMN, but demand is "generally meeting seasonal expectations." Butter makers suggest production activity is steady, as cream remains available from within and outside the Midwest and contacts suggest that the uptick in butter stocks in the latest Cold Storage report is "less concerning for butter than other commodities. As butter's public perception has shown marked improvements in recent years, contacts suggest a need for increased supplies." That said, others "question whether the butter market tones can remain resilient, as all other dairy commodities bear the brunt of low prices and/or instability."

The EU Commission announced that, as expected, it has temporarily changed its public intervention program for skim milk powder (SMP). FC Stone points out that the scheme ran from March to September, with a limit of 109,000 tons at a buy-in price of $2,103.54 per ton, moving to a tender process for additional volume. In 2015 and 2016, the scheme was extended a number of times and effectively remained open continuously with volume limits increased in order to cope with the high volumes being sold into the scheme. The scheme ultimately closed at the end of September 2017, with SMP stocks at 378 kilotons."

"Under the revised system, the commission will forego the automatic buying-in of SMP, instead setting the fixed-price buy-in volume limit for 2018 at zero. The intervention program will still open on the first of March and function as a safety net, with the commission able to buy into the scheme via a tendering process affording them more discretion over the volumes bought into the scheme and the price paid for said product," according to FC Stone, an action it says "will likely prove to be bearish for powder prices in Europe.

U.S. dairy exports keep moving under the farmer-funded Cooperatives Working Together program (CWT). Export assistance was granted to 25 requests from member cooperatives this week. A reported 4.365 million pounds of cheese will move to customers in Asia, the Middle East and North Africa through April and raised 2018 CWT exports to 9.714 million pounds of American-type cheeses and 729,730 pounds of butter (82 percent milkfat) to 10 countries on three continents.

The 2018 International Dairy Foods Assn. Dairy Forum is history. I talked about it in the Jan. 29 "Dairy Radio Now" broadcast with Jerry Dryer, analyst and editor of the Dairy and Food Market Analyst newsletter.

Dryer said he heard good news and bad at the conference, but a series of presenters from inside and outside the dairy industry were very optimistic about the long-term future for dairy, based on a continued growing middle class in the U.S. and world. He said, "As consumers generate more income, they consume more protein and dairy happens to be high on the list of preferred proteins."

When asked about reports, particularly out of Europe, that dairy is antiquated and will be replaced by plant based beverages, Dryer responded, "Not in our lifetime, if ever," as "dairy is highly desirable on most people's minds."

"When a dog bites a man, that's not news," he said. "When a man bites a dog, that's news. Most everyone drinks milk. That's not news. But, when people start drinking oat milk, that's news and the media coverage you see and the interest that you hear about is greatly exaggerated because it's news; it's different."

He admitted 2018 milk prices are bleak, but he ran some possible bullish scenarios by some of the attendees who "looked at me like I was from another planet." They remain bearish, at least the first half of the year, he said, but he will soon issue his long range forecasts and says he "may be a little more bullish."

In politics, the Agriculture Department drew praise from the National Milk Producers Federation and the International Dairy Foods Assn. last week over a proposed rule returning low-fat flavored milk in schools. A joint press release stated that, "In 2012, USDA eliminated low-fat flavored milk as an option in the school meal and a la carte programs, which resulted in students consuming 288 million fewer half-pints of milk from 2012-15."

"Removing low-fat flavored milk causes schools to fail the test of how best to provide optimal nutrition for students," said Beth Briczinski, vice president of dairy foods and nutrition for NMPF. "Fortunately, USDA recognizes the need to be more flexible in providing schools a range of milk options to enhance the dietary intake of the nine essential nutrients milk offers."

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