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Rising Milk Prices, Profit Margins Are Good News for Dairy Farmers

Published: Friday, May 11, 2018

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

The Agriculture Department announced the April Federal order Class III milk price at $14.47 per hundredweight, up 25 cents from March, 75 cents below April 2017 and the highest Class III since December 2017. It equates to $1.24 per gallon, down from $1.31 a year ago. The four-month average stands at $14.02, down from $16.17 a year ago and compares to $13.72 in 2016.

Class III futures last Friday morning portended a May price at $15.10; June, $15.59; July, $15.96; and August at $16.36, with a $16.57 peak in October.

The April Class IV price is $13.48, up 44 cents from March, 53 cents below a year ago, but the highest Class IV since December 2017. Its 2017 average stands at $13.13, down from $15.03 a year ago and compares to $13.06 in 2016.

Some of the wind in dairy's global "sales" got knocked out in the May 1 Global Dairy Trade (GDT) auction. The weighted average of products offered slipped 1.1 percent, following a 2.7 upshot on April 17.

Leading the losses was rennet casein, down 10.5 percent. Anhydrous milkfat was down 1.9 percent, after jumping 5.3 percent last time, and whole milk powder was off 1.5 percent, after it inched .9 percent higher last time.

The gains were led by skim milk powder, up 3.6 percent, which follows a 3.6 percent increase last time. Cheddar was up 3.1 percent and follows a 4.6 percent boost. Lactose inched up .6 percent, after leading the gains last time by 14.8 percent and buttermilk powder was up .5 percent. It was not traded last time.

FC Stone equates the GDT 80 percent butterfat butter price to $2.4991 per pound U.S. CME butter closed last Friday at $2.3525. GDT Cheddar cheese equated to $1.8252 per pound U.S. and compares to last Friday's CME block Cheddar at $1.6650. GDT skim milk powder averaged 90.68 cents per pound. Whole milk powder averaged $1.4657 per pound U.S. CME Grade A nonfat dry milk price closed last Friday at 84¼-cents per pound.

Back home, a small increase in the U.S. All-Milk price average could not overcome sharp increases in corn, soybean and hay prices and thereby pulled the March milk-feed price ratio lower. The USDA's latest Ag Prices report shows the March ratio at 1.97 down from 2.03 in February and 2.40 in March 2017.

The All-Milk price averaged $15.60 per hundredweight, up 30 cents from February but $1.70 below March 2017. The low was $14.10 in Michigan, with California at $14.86, up 11 cents from February, and Wisconsin at $16.20, up 60 cents.

March corn averaged $3.51 per bushel, up 13 cents from February and 2 cents per bushel above March 2017. Soybeans averaged $9.81 per bushel, up 32 cents from February and 12 cents per bushel above a year ago. Alfalfa hay averaged $166 per ton, up $11 from February, and $32 a ton above a year ago.

The March cull price for beef and dairy combined averaged $68.90 per hundredweight, up $3.30 from February, 60 cents below March 2017 and $2.70 below the 2011 base average of $71.60 per hundredweight. Milk cows averaged $1,360 per head in April, down from $1,520 in January, and $280 below April 2017. They averaged $1,300 in California, down from $1,500 in January and $1,600 a year ago. Wisconsin cows averaged $1,320 per head, down from $1,470 in January and $1,710 per head in April 2017.

The April 27 Daily Dairy Report points out that, "Combined with higher feed costs, these prices resulted in a decline in the U.S. milk-over-feed margin to $6.85 per hundredweight based on the dairy Margin Protection Program (MPP) calculation, the lowest result so far this year and the lowest margin since June 2016."

"In 2017, the milk-over-feed margin, based on these calculations, did not fall below $7 per hundredweight. If current futures projections are to be believed, the worst margins for 2018 are potentially in the rearview mirror at the end of this month."

Meanwhile, Chicago-based Commodity & Ingredient Hedging LLC's latest Margin Watch said, "Dairy margins improved slightly over the last half of April as increased milk prices more than offset the impact of rising feed costs. While margins are still only about average from a historical perspective, with the exception of spot second quarter, they are projected positive into early 2019.

"Milk prices are drawing support from a delayed spring flush following unseasonably cold weather in the Upper Midwest while a recent surge in nonfat dry milk prices has lifted Class IV milk futures on the CME."

"Feed costs have continued to advance on strong demand amidst ongoing planting delays," according to the MW. "USDA reported corn planting progress for the week ending April 29 at 17 percent complete compared to 32 percent last year and 30 percent on average for the end of April over the past 10 years. Soybean planting progress was reported at 5 percent complete versus 9 percent last year and 6 percent on average for this point in the season."

Dairy farmers have until June 1 to sign up for one of Uncle Sam's dairy safety nets, but National Milk President and CEO Jim Mulhern states, "While the Agriculture Department currently allows farmers the option of using either the MPP or LGM programs, but not both simultaneously, the elimination of the budget cap on LGM policy underwriting may make that program more attractive to larger-scale operations, as the support provided by MPP tapers offs for bigger herds. What's more, the new risk management options that USDA is expected to introduce should create a menu of options that will likely be of particular interest to larger producers."

The Progressive Agriculture Organization thinks otherwise and called on lawmakers to "take immediate action to help correct the pricing inequities that the majority of dairy farmers are experiencing. Also, there is much advice given to dairy farmers in an attempt to prevent more suicides by our dairy farmers. There is only one way to prevent suicides by dairy farmers," Pro Ag concludes, "and this is simply is to give the dairy farmers a fair price for their milk."

Dairy prices start May a little stronger. Block Cheddar closed last Friday at $1.6650 per pound, up 4½ cents on the week and 6½ cents above a year ago when it jumped 12 cents. The barrels skyrocketed to $1.6025 last Tuesday, highest price since Dec. 15, 2017, but finished last Friday at $1.60, up 11¼ cents on the week, 15 cents above a year ago, and a closer to normal 6½ cents below the blocks. Twenty-four cars of barrel sold on the week at the CME and 3 of block.

Cheese Market

The cheese market tone remains uncertain, according to Dairy Market News, but Central sales activity is reported as fair to up slightly. Cheese production in the West has remained active as milk availability is stronger. Block and barrel demand is solid, keeping market prices at higher levels. Cheese demand from the international market is good due to favorable U.S. prices, but participants are impatiently waiting for the grilling season here, hoping that it will help increase cheese sales and relieve processor pressure of having higher inventories.

Cash butter finished the week at $2.3525 per pound, down three-quarter cents, but 24½ cents above a year ago, with 55 cars exchanging hands on the week.

Butter market prices appear to be easing, but butter interest is appealing, in both domestic and foreign markets. Stronger cream availability in the West is conducive to churning. Some contacts report that higher freight costs to move cream out of the West are also contributing to augmented butter production. Butter stocks are ample, says DMN, and U.S. prices are competitive with international prices and export sales are "lively."

Spot Grade A nonfat dry milk, after four previous weeks of gain, shot to 85½ cents per pound last Monday, highest price since Sept. 1, 2017. But it closed last Friday at 84¼ cents, unchanged on the week and a quarter-cent below a year ago, with 19 carloads sold on the week.

Dry whey closed the week at 31¾ cents per pound, up three-quarter cents.

USDA's latest Dairy Products report pegged March cheese output at 1.1 billion pounds, up 11.6 percent from February and 2.7 percent above March 2017. That put first quarter output at 3.2 billion pounds, up 2.9 percent from a year ago.

California produced 215.7 million pounds of that cheese, up 8.6 percent from February but .4 percent below a year ago. Wisconsin, at 290.2 million pounds, was up 10.3 percent from February and 1.6 percent above a year ago. Idaho contributed 86.1 million pounds, up 19 percent from February and 3.6 percent above a year ago. Minnesota, at 63.9 million pounds, was up 11 percent from February and 3.5 percent above a year ago. New Mexico produced 76.1 million pounds, up 17.4 percent from February and 14 percent above a year ago.

Italian cheese totaled 481.6 million pounds, up 12.9 percent from February and 2.5 percent above a year ago. Year-to-date (YTD) Italian cheese is at 1.4 billion pounds, up 3.9 percent from a year ago. Mozzarella, at 371.5 million pounds, was up 2.8 percent, with YTD at 1.1 billion pounds, up 3.6 percent.

American-type cheese production totaled 437 million pounds, up 10 percent from February and 1.7 percent above a year ago, with YTD at 1.3 billion pounds, up 1.1 percent. Cheddar output, the cheese traded at the CME, totaled 314.8 million pounds, up 7.3 percent from February but 2.7 percent below a year ago, with YTD Cheddar hitting 926.3 million pounds, down 1.7 percent.

Butter churns produced a bearish all time high of 185.6 million pounds, up 9.1 percent from February and 4.8 percent above a year ago. YTD butter output is at 537.8 million pounds, up 4.2 percent.

California butter output totaled 59 million pounds, up 16.4 percent from February and 16.4 percent above a year ago. Pennsylvania was down 5.3 percent from February and 7.6 percent below a year ago.

Yogurt output amounted to 392.3 million pounds, down 4.7 percent from a year ago, with YTD hitting 1.1 billion pounds, down 2.6 percent.

Dry whey totaled 88 million pounds, up 1.5 percent, with YTD output at 267.9 million pounds, up 8.6 percent. Stocks totaled 74.7 million pounds, down 15.4 percent from February and 3.5 percent below those a year ago.

Nonfat dry milk production totaled 180.3 million pounds, up 14.2 percent from February and 12 percent above a year ago. YTD output stands at 498.4 million pounds, up 8.8 percent. Stocks slipped to 298 million pounds, down 400,000 pounds, or .1 percent, from February but 51.5 million pounds, or 20.9 percent, above a year ago. February stocks were revised 25.6 million pounds lower.

Skim milk powder production totaled 41 million pounds, up 8.8 percent from February but 22.2 percent below a year ago.

Cheese Output Climbs

Checking dairy's rearview mirror, the Dairy Products Summary shows total cheese production hit 12.7 billion pounds in 2017, up 3.9 percent from 2016. Wisconsin produced 3.25 billion pounds of that, or 26.6 percent. California was a distant second, at 2.51 billion, with No. 3 Idaho, at 954.99 million pounds.

U.S. butter production totaled 1.85 billion pounds, just .4 percent above 2016. California was the leading state at 534.38 million pounds, or 28.9 percent, of total U.S. production. Pennsylvania was second at 95.6 million pounds, and New York third with 27.5 million pounds.

The U.S. produced 1.84 billion pounds of nonfat dry milk for human consumption, up 4.7 percent from 2016, and skim milk powder totaled 530 million pounds, down 5.3 percent. Dry whey totaled 1.037 million pounds, up 8.6 percent.

Milk production increased 1.4 percent in 2017 to 215 billion pounds. The rate per cow, at 22,941 pounds, was 163 pounds above 2016. The annual average number of milk cows on farms was 9.39 million head, up 67,000 head from 2016.

The 2017 Milk Production, Disposition and Income Summary shows cash receipts from marketings of milk totaled $37.9 billion, up 9.8 percent from 2016. Producer returns averaged $17.69 per hundredweight, up 8.3 percent. Marketings totaled 214.5 billion pounds, 1.5 percent above 2016.

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