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Tough Times for Dairy Continue, Despite Higher Class III Prices


by Lee Mielke

Published: Friday, June 8, 2018

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

Happy June Dairy Month, though it's not too happy for dairy producers struggling to make ends meet.

The May Federal order Class III benchmark milk price was announced May 31 at $15.18 per hundredweight, up 71 cents from April but still 39 cents below May 2017, though it is the highest Class III price since December 2017. It equates to about $1.31 per gallon, up from $1.24 in April.

The five-month Class III average stands at $14.25, down from $16.05 at this point a year ago but compares to $13.53 in 2016.

Class III futures late last Friday morning portend a June Dairy Month Class III price of $15.51 per hundredweight; July, $16.22; and August at $16.79, with a peak of $16.94 in September.

The May Class IV price is $14.57, up $1.09 from April, 8 cents above a year ago, and the highest it has been since October 2017. Its five-month average is at $13.42, down from $14.92 a year ago and compares to $13.06 in 2016.

The tough times on the farm was more evident in the Agriculture Department's latest Ag Prices report. The report showed another gain in the U.S. all-milk price average but that was overwhelmed by a sharp rise in the alfalfa hay price and increases in corn and soybeans, thereby sending the April milk feed price ratio lower for the fifth month in a row. The April ratio is at 1.90 down from 1.97 in March and compares to 2.22 in April 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 just 1.9 pounds of dairy feed containing that blend.

The U.S. all-milk price averaged $15.80 per hundredweight, up 20 cents from March but that's still 70 cents below April 2017. Michigan again showed the bottom price at $14.50, with California at $15.26, up 40 cents from March, and Wisconsin at $16.30, up a dime.

April corn averaged $3.58 per bushel, up 7 cents from March and 15 cents per bushel above April 2017. Soybeans averaged $9.83 per bushel, up 2 cents per bushel from March and 50 cents per bushel above a year ago. Alfalfa hay averaged $183 per ton, up $17 from March, and $33 per ton above a year ago.

The U.S. milk-over-feed margin is down 15 cents from March to $6.62 per hundredweight based on the dairy Margin Protection Program (MPP) calculation. The Daily Dairy Report says the margin was the lowest since June 2016's $5.75 per hundredweight.

Looking at the cow side of the ledger, the April cull price for beef and dairy combined averaged $67.50 per hundredweight, down $1.40 from March, $4.70 below April 2017 and $4.10 below the 2011 base average of $71.60 per hundredweight.

The cash dairy markets ended the Memorial Day holiday-shortened week with block Cheddar at $1.5975 per pound, down 1¼ cents on the week, 10¼ cents below a year ago, and 6¼ cents lower than it was on May 1, as the week's global politics may have influenced traders some. More on that ahead. The barrels finished at $1.52, down 2½ cents on the week, 3 cents above a year ago, but 8¼ cents below its May 1 perch. There were 7 cars of block that traded hands on the week at the CME and 26 of barrel.

Cheese demand reports suggest a steady to slower market for most types of processors, according to Dairy Market News, with the exception of cheese curd makers. The seasonal return of fairs and street festivals has renewed cheese curd buying vigor. Although heat and humidity in the Midwest had some contacts questioning near-term milk availability, there was no shortage during the last week in May. A growing amount of cheesemakers took to the spot milk market, as loads ranged $4 to $5 under class. Cheese production is ramping up as a result but the market tone is "somewhat stable," according to DMN.

Western cheese output is active as some of the available fluid milk clears to cheese plants but the cheese market seems to be balanced, says DMN. Prices have been up and down in the last weeks but they haven't deviated much. Cheese inventories are up, but staying manageable. Domestic and international sales are solid and the U.S. cheese market is currently very competitive as U.S. prices continue below international prices. However, some contacts are worried that an upsurge in the exchange rate might negatively affect export demand. Others believe that the price gap between the EU and the U.S. is big enough that an increase in the value of the dollar won't have much effect on export sales.

FC Stone's Dave Kurzawski provides an interesting sidelight in his May 29 Early Morning Update that "rBST is almost history across the country. Several major cheese manufactures have recently pulled their producers off of rBST. This time around western dairy producers will be taking the brunt of the hit. Producers with Jersey herds will be impacted much more dramatically than their Holstein herd peers. It will take several months to get a good idea of the overall impact, but this should curb surplus milk production from these producers supplying processors." "Although one thing is clear, the past few years of mediocre milk prices has caused the U.S. dairy producer to only become more efficient at milking cows," according to Kurzawski.

Cash butter climbed to $2.4250 per pound last Tuesday but closed last Friday at $2.3775, down 3¾ cents on the week, 10¾ cents below a year ago when it jumped 12½ cents, but is 1¾ cents above where it was on May 1. A whopping 65 cars were sold on the week at the CME, 32 on Friday alone.

DMN says the butter markets reacted to the NASS Cold Storage increases as many contacts expected them to—"indifferently, if not bullishly." Upper Midwest butter makers report that cream is unexpectedly tight and buying interest remains generally healthy in both salted and unsalted varieties.

Western butter remains active. Although ice cream manufacturers are pulling more cream, there is still plenty to keep the churns busy. Butter inventories are growing along seasonal patterns and contacts say current domestic demand is solid. International demand ebbs and flows. Inquiries from global buyers are not unlimited, and "U.S. butter makers feel there is a lot of tire kicking going on. The U.S. butter price may be favorable when compared to international butter prices, however, the work involved with converting the butterfat to a form acceptable to international interests gives some U.S. manufacturers a pause," said DMN.

Spot Grade A nonfat dry milk closed the week at 82½ cents per pound, down 1¾ cents on the week, 12¼ cents below a year ago, and dead even with its May 1 price. There were 6 cars that exchanged hands on the week.

The CME's newest addition, dry whey, had a good week, hitting a new high of 39 cents per pound last Thursday but it inched back last Friday to close at 38½ cents, 1¼ cents higher on the week, with 9 cars being sold the four days of trading.

An outbreak of Mycoplasma bovis in New Zealand has drawn a lot of attention in the industry and HighGround Dairy's Manager of Dairy Market Intelligence, Alyssa Badger, talked about it in the May 28 Dairy Radio Now interview.

Badger says officials believe the outbreak occurred on a farm on the South Island but said it's hard to know for sure because producers are forcing ministry officials to obtain police warrants or court orders to get on farms. She said the reaction is "very disappointing because all they want to do is eradicate this disease."

She said about 11,000 cows have been culled so far and the government plans to cull 150,000 in the next one to two years but there is no differentiation between dairy and beef cows.

The pattern they have seen is that they find a trace of M-bovis in some of the older cows and then suddenly disappears "so they're still trying to learn how to handle this." Badger believes the government will continue efforts to eradicate the disease because it's affecting the young and stressing them. She believes that New Zealand and Norway were the only two countries that had not seen M-bovis before.

When asked what impact this outbreak will have on New Zealand milk production and possibly the global market, Badger replied, "The effect will be little to none because most of the cows getting culled aren't in milk yet or they were the stressed cows that weren't in milk anyway." Weather will have the biggest impact, according to Badger, and Fonterra's $7 per kilogram of milk solids milk price announcement for the 2018-19 season is "going to signal to the farmers to push as much milk out as possible so ultimately this disease really isn't going to have much of an impact on milk production at all."

Back home, the USDA's latest Crop Progress report shows that 92 percent of the nation's corn has been planted, as of the week ending May 27, up 2 percent from that week a year ago and the five-year average. It also shows 79 percent is rated in good to excellent condition, up from 65 percent a year ago.

The report also shows 77 percent of the soybeans have been planted, up from 65 percent a year ago and compares to 62 percent in the five-year average. There is 47 percent of the crop emerged, up 8 percent from a year ago and 15 percent ahead of the five-year average. Cotton planting is at 62 percent, up 1 percent from a year ago and 3 percent ahead of the five-year average.

Cooperatives Working Together member cooperatives accepted offers of export assistance that helped them capture contracts to sell 202,825 pounds of Cheddar cheese, 1.66 million pounds of butter and 2.646 million pounds of whole milk powder, to customers in Asia, Europe, the Middle East and Oceania.

The product has been contracted for delivery through October and raised CWT's 2018 exports to 35.36 million pounds of American-type cheeses, 11.035 million pounds of butter (82 percent milkfat) and 10.18 million pounds of whole milk powder to 25 countries on five continents.

In politics, the words "Trade War" have returned and with them, retaliatory tariff threats, following the Trump administration's decision to lift exemptions on steel and aluminum imports from Canada, Mexico and the EU.

Mexico specified retaliatory tariffs on steel, pork legs, sausages, apples, grapes, cranberries and various cheeses effective June 1.

FC Stone points out that "This is the first time in the Trump era that cheese is on the negotiating table. Will it matter? We don't know yet."

The May 31 Daily Dairy Report stated, "If history serves as a guide, Mexico would likely focus its tariffs on Cheddar and Gouda from the United States. Through the first quarter of this year, the United States has shipped 26,638 metric tons, or 58.7 million pounds of cheese to Mexico, which accounted for 27.6 percent of total exports. Mexico remains the top cheese trade partner for the United States."

A second vote on the farm bill is scheduled for June 22. National Milk's Chris Galen says the expectation is that by then, immigration legislation, which conservatives who voted against the farm bill want to have dealt with first, will get a vote. He says we should know more once the House and Senate return from the Memorial Day break.

The Senate, the Agriculture Committee has been working more slowly than the House, according to Galen, but a vote in committee is likely in June as well.

Proposed changes to the dairy title of the farm bill don't hold a lot of hope for dairy producers, according to Arden Tewksbury, manager of the Progressive Agriculture Assn. Tewksbury points out, "With prices being paid to dairy farmers still lingering far behind the national average cost of producing milk, and where it appears there is no real effort being made to give dairy farmers a fair price for their milk, Pro-Ag is therefore urging the Senate Agriculture Committee to immediately take appropriate action to place a floor price under milk that is used to manufacture dairy products."

The proposal would establish a floor price at $16 per hundredweight on July 1, followed by the price being set at $18 per hundredweight on Sept. 1, and $20 on Nov. 1.

Tewksbury wrote, "I believe with school soon to be dismissed for the summer, additional milk would have to be marketed otherwise. Our $20 floor price is very defensible. Anything less than this program will only continue the exiting of hundreds (if not thousands) of more dairy farmers this summer."

Pro-Ag called on the Senate Agriculture Committee to "take leadership on our proposal, and hopefully the House members will follow their proposed actions."

The proposal also suggests consideration of a supply management program "to be implemented similar to the program contained in the Federal Milk Marketing Improvement Act, identified as S-1640. This program would be administered only when needed (which might be immediately)," Tewksbury warned.

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