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February Benchmark Milk Price Declines to $13.40

by Lee Mielke

Published: Friday, March 9, 2018

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

The federal order benchmark milk price has dipped further but looks to be at the bottom for the year. The Agriculture Department announced the February Class III price at $13.40 per hundredweight, down 60 cents from January, $3.48 below February 2017 and the lowest Class III since June 2016. The price equates to $1.15 per gallon, down from $1.20 in January and $1.45 a year ago.

Class III futures last Friday morning portended a March price at $14.08; April, $14.04; May, $14.25; and June at $14.72, with a peak of $15.95 in October.

The February Class IV price is $12.87, down 26 cents from January, $2.72 below a year ago, and the lowest Class IV price since April 2016.

The Daily Dairy Report's Sarina Sharp warned in the Feb. 23 Milk Producers Council newsletter that "Continued growth in the milk cow herd will delay the recovery in milk prices. However, processing capacity limitations and financial pressures are likely to stall further expansion. Auctions around the country are regularly announcing herd dispersal sales, and springer values are slipping."

Preliminary USDA data put January's 50-state milk production at 18.5 billion pounds, up 1.8 percent from January 2017. The latest Dairy Products report pegged January cheese output at 1.08 billion pounds, down 1 percent from December but 3.4 percent above January 2017.

California produced 216.6 million pounds of that cheese, down .4 percent from December but 2.7 percent above a year ago. Wisconsin, at 283.9 million pounds, was down 2 percent from December and 2.8 percent above a year ago. Idaho contributed 85.1 million pounds, up .4 percent from December and 3.2 percent above a year ago, and Minnesota, at 60.8 million pounds, was down 3.2 percent from December but 6.3 percent above a year ago. New Mexico produced 68.2 million pounds, up 2.3 percent from December and 1.1 percent above a year ago.

Italian cheese output totaled 469.6 million pounds, up .5 percent from December and 3.4 percent above a year ago. Mozzarella, at 363.1 million pounds, was up 3.1 percent.

American-type cheese production totaled 428.9 million pounds, down 1 percent from December but 2.7 percent above a year ago. Cheddar output, the kind traded at the CME, totaled 312.4 million pounds, down 1.5 percent from December and just .3 percent above a year ago.

U.S. churns produced 185.5 million pounds of butter, up 9 percent from December and 4.3 percent above a year ago.

California butter totaled 53.9 million pounds, up 7.1 percent from December and 4.5 percent above a year ago. Pennsylvania was unchanged from December and was down 5.6 percent from a year ago.

Yogurt output, at 368.7 million pounds, was down 1.6 percent from a year ago.

Dry whey totaled 87.1 million pounds, up 9.1 percent. Stocks totaled 87.1 million pounds, down 11.7 percent from December but 28.6 percent above a year ago.

Nonfat dry milk production totaled 161.7 million pounds, down 1.2 percent from December but 5.4 percent above a year ago. Stocks hit 340.2 million pounds, up 20.1 million, or 6.3 percent, from December and a hefty 113.4 million pounds, or 50 percent, above a year ago.

Skim milk powder production totaled 45.8 million pounds, down 8.3 percent from December and 17.2 percent below a year ago.

FC Stone's Dave Kurzawski wrote in his March 2 Early Morning Update, "Cheese production seems to have shifted a bit back towards Mozzarella production." "While not blatantly bullish, this shift back toward Mozzarella production is a positive sign for overall demand and may mean less cheese is available to be sold via the spot market."

He still believes spot prices will "generally move higher going forward based on solid domestic demand at the moment, export interest and, perhaps, less Cheddar production than meets the eye," but he added, "mild weather and readily available heifer replacements may keep markets cautious. As milk per cow has been running way ahead of last year due to mild weather in most of the U.S. production areas. This increased MPC with stronger average components is helping to soften the blow to U.S. producers in general."

Cash cheese strengthened as February came to a close and traders weighed the Dairy Products report. Block Cheddar closed March 2 at $1.56 per pound, up 6½ cents on the week and 8 cents above a year ago, when it fell 9½ cents. The barrels finished at $1.4750, up 1½ cents on the week, 3¾ cents above a year ago, and a slightly higher than normal 8½ cents below the blocks. Four cars of block traded hands on the week and 33 of barrel.

Midwestern cheesemakers are reporting steady retail and food service demand, according to Dairy Market News. Mozzarella and Provolone buyers, some of whom are located in other regions, are expected to add orders ahead of the college basketball tournament season. Spot milk loads were mostly discounted, although there were a few loads above class. With spring flush ahead, a number of Midwestern cheese producers have suggested that spot milk will only garner their interests if it is "noticeably discounted."

A sharp drop in the U.S. all-milk price average, plus higher corn and hay prices, pulled the January milk feed price ratio lower again. The Agriculture Department's latest Ag Prices report puts the January ratio at 2.19, down from 2.38 in December and 2.71 in January 2017.

The index is based on the current milk price in relationship to feed prices for a dairy ration consisting of 51 percent corn, 8 percent soybeans and 41 percent alfalfa hay. In other words, one pound of milk today purchases 2.19 pounds of dairy feed containing that blend.

The January Margin Protection Program milk-feed margin was at $8.11 per hundredweight, lowest level since July 2016 and a drop from December's $9.36 margin.

The U.S. all-milk price averaged $16.10 per hundredweight, down $1.10 from December and $2.80 below January 2017. Michigan showed the lowest at $14.90, with California at $15.06 and Wisconsin at $16.30.

January corn averaged $3.29 per bushel, up 6 cents from December, after rising 8 cents in December, but is 11 cents per bushel below January 2017. Soybeans averaged $9.30 per bushel, unchanged from December and 41 cents per bushel below a year ago. Alfalfa hay averaged $152 per ton, up $4 from December, and $26 per ton above a year ago.

The January cull price for beef and dairy combined averaged $63.30 per hundredweight, up $1.30 from December but is 70 cents below January 2017 and $8.30 below the 2011 base average of $71.60.

Milk cows averaged $1,620 per head in 2017, down from $1,760 in 2016. They averaged $1,600 in California, down from $1,750 in 2016, and Wisconsin cows averaged $1,680, down from $1,850 in 2016.

In politics, the U.S. better consider trade policy changes long and hard. A new study by Informa Economics says the current free trade agreement with Mexico is the driving force behind $1.2 billion in U.S. dairy exports to Mexico as well as billions more in economic contributions.

A press release from the National Milk Producers Federation states, "Mexico is the No. 1 market for U.S. dairy product exports, accounting for roughly one-fourth of total U.S. exports. In 2016, the most recent year examined by Informa, the U.S. shipped $1.2 billion worth of dairy products to Mexico, up from $201 million in 2002. In 2016, Mexico accounted for 45 percent of total U.S. skim milk powder exports to all destinations, as well as 30 percent of cheese exports, 10 percent of butter exports and 8 percent of whey exports."

The analysis states that "total economic contributions (direct, indirect and induced) created by dairy sales to Mexico show the true importance of these exports to the overall U.S. economy. Including impacts to industries that are linked to U.S. dairy exports to Mexico, the aggregate 2012-16 output value of $6.7 billion is magnified to $23.3 billion in economic output."

Informa's analysis found that for every $1 of sales associated with dairy exports to Mexico, an additional $2.50 in output (industry sales) is supported elsewhere in the U.S. economy. U.S. dairy exports to Mexico also created 16,492 full-time equivalent jobs while directly generating an aggregate GDP of $8.4 billion over that five-year period, according to NMPF.

"This analysis not only illustrates the importance of preserving existing market access to Mexico under North American Free Trade Agreement (NAFTA), but also demonstrates why we are urgently pursuing new opportunities via U.S. free trade agreements around the globe," said U.S. Dairy Export Council (USDEC) president and CEO Tom Vilsack. "Virtually every U.S. free trade agreement to date has yielded positive results for dairy, and current negotiations hold great potential for the industry."

Following on the heels of that report, the Trump Administration announced that it will impose a 25 percent steel tariff and 10 percent aluminum tariff on imports. The ramifications of that could spill into other trade commodities, including dairy.

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