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Total Cheese Inventory Sets a Record High

by Lee Mielke

Published: Friday, July 6, 2018

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

May butter stocks were up considerably from April and a year ago, according to the Agriculture Department's latest Cold Storage data. The May 31 inventory stood at a bearish 338.8 million pounds, up 31.5 million pounds, or 10.3 percent, from April and the largest end-of-May volume since 1993, according to the Daily Dairy Report, and 25.2 million pounds, or 8 percent, above May 2017.

American type cheese, which includes Cheddar, climbed to 804.7 million pounds, up 24.5 million pounds, or 3.1 percent, from April, but 11.5 million, or 1.4 percent, below a year ago.

The other cheese category hit 549.7 million pounds, up 13.9 million pounds, or 2.6 percent, from April and 83.3 million, or 17.9 percent, above a year ago.

That put the total cheese inventory at a bearish record high 1.386 billion pounds, up 40.6 million pounds, or 3 percent, from April and 76.9 million, or 5.9 percent, above a year ago. If it's not sold, it ends up in the cold.

A higher U.S. all-milk price average could not offset higher feed prices but the May milk feed price ratio was unchanged from April, ending five consecutive months of decline. The Agriculture Department's latest Ag Prices report shows the May ratio at 1.90, unchanged from April but down from 2.20 in May 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 1.9 pounds of dairy feed containing that blend.

The U.S. all-milk price averaged $16.20 per hundredweight, up 40 cents from April but still 50 cents below May 2017. Michigan and New Mexico showed the bottom price at $14.80, with California at $15.66, up 40 cents from April, and Wisconsin at $16.70, also up 40 cents.

May corn averaged $3.67 per bushel, up 9 cents from April after jumping 7 cents from March, and is 22 cents per bushel above May 2017. Soybeans averaged $9.84 per bushel, up a penny from April but 55 cents above a year ago. Alfalfa hay averaged $189 per ton, up $6 from April, and $32 ton above a year ago.

Looking at the cow side of the ledger, the May cull price for beef and dairy combined averaged $66.20 per hundredweight, down $1.30 from April, $7.10 below May 2017 and $5.40 below the 2011 base average of $71.60 per hundred-weight.

The U.S. milk-over-feed margin improved 16 cents from April to $6.78 per hundredweight, according to the Daily Dairy Report, based on the dairy Margin Protection Program calculation. "By this formula, the national averages for income-over-feed margins were slightly lower in March and April 2018, but otherwise this was the lowest figure since June 2016's $5.75 per hundredweight," the DDR stated.

The latest Crop Progress report shows that 77 percent of the nation's corn is rated good to excellent, as of the week ending June 24, up from just 67 percent that week a year ago. The report shows 73 percent of the soybeans are rated good to excellent, up from 66 percent a year ago. Looking at the cotton crop, 42 percent is rated good to excellent, down from 57 percent a year ago.

Cheese prices rallied the last week of June Dairy Month following three weeks of loss, especially on the barrels. CME block Cheddar closed that Friday at $1.5550 per pound, up 6½ cents on the week, 3 cents above a year ago, but down 4¼ cents from where it was on June 1. The barrels, after plunging to a nine-year low of $1.2050 last Monday, brought back the buyers and rallied to last Friday's close of $1.39, up 10½ cents on the week, 3¾ cents above a year ago, but down 13 cents on the month, and an unsustainable 16½ cents below the blocks. Five cars of block traded hands on the week at the CME and 80 of barrel. A total of 231 cars of barrels have traded hands since June 1 and 62 of block.

Dairy Market News says the cheese market tone is "undoubtedly shaken by a laundry list of bears: trade concerns, cold storage data and recently inconsistent barrel demand to name a few." Milk into cheese production remains discounted at $3 to $4 under class and plant managers expected discounts to remain into the Independence Day week. "However, as temperatures rise throughout the country, some are expecting volumes to wane following the holiday week."

Western sources report that international cheese demand has started to slip and some overseas customers are cancelling contractual orders, blaming current trade issues. Some U.S. cheese sellers say that they are adjusting prices down to maintain current contracts. Stocks, particularly for barrel cheese are plentiful. As the result, several cheese processors are shifting from barrels to blocks as a way to prevent inventories from increasing too much. Others are cutting output.

Spot butter, after dipping to $2.2450 per pound last Tuesday, lowest price since April 16, finished last Friday at $2.2675, down 2¼ cents on the week, 3¾ cents below a year ago, and 11 cents lower than its June 1 perch. Twenty-six sales were reported on the week.

Central butter producers, like a number of processors in the dairy industry, are concerned about recent market trends. There still is confidence in the foundation of the butter market, and some analysts maintain that butter may be near or at its basement but some contacts point out a steady to slowing demand. Cream remains available even during the ice cream manufacturing peak.

Western contacts say butter demand has softened. Cream is readily available but with higher multiples, some manufacturers are willing to sell the milkfat to ice cream manufacturers. "By slowing the churns, butter processors hope to stem the growth of inventories," said DMN, as butter stocks have grown considerably.

Cash Grade A nonfat dry milk closed last Friday at 74¾ cents per pound, down 1½ cents on the week, 9¾ cents below a year ago, and down 7¾ cents from June 1, with 18 sales reported for the week at the CME.

Dry whey saw last Friday's CME closing at 40¾ cents per pound, up a penny on the week but 2¼ cents lower since June 1, with 2 cars purchased on the week.

The European Commission accepted 56 bids for skim milk powder (SMP) from its June 19 tender. The sale totaled 51.9 million pounds from its intervention program and most was at an equivalent price of 67 cents per pound, according to the Daily Dairy Report. The commission still holds 585 million pounds.

The Times of India reported that the Gujarat government has announced export support for Gujarat Milk Marketing Federation that markets product under the brand Amul, to clear the huge inventory of SMP it is holding.

HighGround Dairy said, "India has not exported anything close to 132 million pounds of SMP since 2014, so the remainder of 2018 would place India (using July-December 2017 data) as the fifth largest exporting region behind the European Union, United States, New Zealand and Australia. In a market that remains saturated with stock, this news was not what market bulls were hoping for."

FC Stone's Dave Kurzawski reported in his June 27 Early Morning Update of "rumors floating around that the EU Commission will double the number of monthly tenders to sell the intervention skim." He says the vote is slated for July 5 and if approved, would begin in November.

Kurzawski also addressed the global markets stating, "A majority of the talk surrounding the recent and drastic sell off on cheese and Class III (futures) revolves around President Trump's newly imposed tariffs on the likes of China and Mexico. However, putting the blame solely on the administration is a bit of a stretch. A larger issue at play here seems to be the current over supply of barrels in the market place, which is not an abundantly exportable cheese."

Speaking in the July 2 Dairy Radio Now broadcast, Kurzawski admitted that, while the Mexican tariffs sent jitters throughout the market and are not good when trying to grow U.S. dairy exports, the reality is that those tariffs are only projected to effect a 4-5 cent reduction in the cheese price and not the 25-30 cents that we saw in the barrel market over the last couple weeks.

"The seeds of this precipitous decline in the spot cheese market, particularly on the barrel side in the month of June, were sown probably a month or two ago," he argued. Global dairy demand was great the first four to five months of 2018, he said, but in mid-May "the spigot was turned off, things calmed down, and the markets were of the mindset that we have enough milk for the time being. We had really good demand that was eating away at that milk, allowing us to make cheese, but now we have a lot of fresh cheese sitting out there and the phone stopped ringing."

"The sellers got really aggressive and said, we can bleed out slowly at $1.40 (per pound) or we can go down and try to find a bid and I think they found a bid at the low $1.20s," he said, though he doesn't believe prices will stay that low for long.

Summer heat can change this in a hurry, he said, as can other factors like cows coming off rbST in key areas, labor issues, poor income-over-feed margins, and continued good global demand. "This is not 2009," he concluded "even though we can see a price on the spot barrel market that we haven't seen since 2009."

In other trade news, more than 60 companies and organizations representing U.S. dairy farmers and cheese makers commended President Trump this week for "his efforts on equitable trade and for insisting that Canada halt its market-distorting dairy practices." A joint press release stated that the companies also urged the administration to "reconsider its imposition of new tariffs on Mexico in light of that country's constructive engagement in NAFTA negotiations and the harm that Mexico's retaliatory tariffs will have on U.S. dairy's trade with its largest and most reliable market."

"These tariffs will certainly diminish demand for high-quality dairy products that are produced across the U.S. The production of cheese and other dairy products in the U.S. supports nearly 3 million American jobs. The additional Mexican duties also will allow the European Union, which recently signed a bilateral free trade agreement with Mexico, to take hard-earned market share from American dairy companies."

The companies in a letter asked the administration to "work collaboratively with Mexico and suspend the steel and aluminum tariffs on Mexican products until the negotiations for a modernized North American Free Trade Agreement have been concluded."

It commended Mexico for being "a model for open dairy trade with the U.S. Through investment and cooperation, the U.S. has become Mexico's biggest dairy supplier, with cheese purchases last year totaling nearly $400 million pounds. Today, Mexico accounts for about one-quarter of U.S. dairy exports. Until the tariffs were imposed, all U.S. dairy products enjoyed duty-free access into the Mexican market."

The letter's stated goals were endorsed by the U.S. Dairy Export Council, the International Dairy Foods Assn. and the National Milk Producers Federation.

In politics, the Senate passed its farm bill June 28, 86 to 11, which drew praise from the NMPF and the IDFA. A NMPF press release stated, "With the House having adopted its version on June 21, the two chambers must now reconcile differences in the two bills in a conference committee later this summer."

NMPF thanked Agriculture Committee Chairman Pat Roberts (R-Kan.) and Ranking Member Debbie Stabenow (D-Mich.) for "their leadership in finalizing the measure in a timely manner, and commended Stabenow for her work to secure $100 million in additional funding for the dairy title baseline."

"Sens. Roberts and Stabenow have crafted a bipartisan farm bill that includes important dairy policy improvements at a time when many farmers are facing a very tough economic time," said NMPF President and CEO Jim Mulhern. "We are pleased that the two chambers now have the opportunity to harmonize their versions to produce a final bipartisan, bicameral bill that can be signed into law by Sept. 30."

The Senate version contains enhancements to the dairy Margin Protection Program (MPP), including improved coverage levels and greater program flexibility. The bill, which renames the MPP as the "Dairy Risk Coverage" program, raises the maximum covered margin to $9 per hundredweight and adjusts the minimum percentage of milk that can be insured. It also includes an important agreement reached between NMPF and the IDFA on price risk management.

Meanwhile, the house defeated its "Compromise Immigration Bill," 121 to 301 on June 27. You'll recall the bill was withdrawn from consideration from the House floor the previous week because there weren't enough votes to pass it.

Bob Gray, editor of the Northeast Dairy Farmers Cooperatives newsletter wrote, "In order to try and secure additional votes the House leadership added the Ag Guest Worker and mandatory E-Verify provisions from the Goodlatte Bill, H.R. 4760. However, these provisions failed to add votes to the compromise package so they were pulled from the bill when it was presented on the floor."

Gray says the House leadership has promised it will take up a guest worker program in late July that will cover a broad sector of the U.S. business economy, including agriculture.

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