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New Trade Agreement Levels the Playing Field with Canada

by Lee Mielke

Published: Friday, October 12, 2018

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

Last week's Global Dairy Trade auction was overshadowed by the 11th hour announcement the last day of September that the U.S. and Canada reached an agreement, keeping the North American Free Trade Agreement (NAFTA) a three-country agreement. It will be referred to as the U.S. Mexico, Canada Agreement. But, no end is in sight in the China trade war.

Mexico and the U.S. came to an agreement first which pressured Canada's Prime Minister Justin Trudeau and dairy issues were the main obstacles preventing that. Trudeau caught heat immediately from his dairy farmers but he has promised them "compensation" for their losses.

The new 16-year agreement mandates that the Canadian government eliminate its Class 7 milk pricing scheme in six months and American dairy producers will have an increased access (3.6 percent) to Canada's dairy market.

The increased access comes through tariff rate quotas that phase in over the course of 19 years, explains FC Stone.

"For instance, it looks like the U.S. will be able to ship 2,084 MT (45.9 million pounds) of cheese to Canada tariff free in the first year the agreement is in force, with half the cheese being for industrial use and half for retail. The Canadian government will oversee issuing import licenses to companies in Canada who wish to import U.S. dairy products at the zero percent tariff rate," but FC Stone warns, "It's possible some of the import licenses will be allocated to entities in Canada who aren't interested in importing product but will sit on their licenses to keep others from importing product."

"Once the formal agreement is approved by Canada's Prime Minister and Mexico's President (likely in the next two months), it will have to undergo a 60-day review process by Congress and would likely be enacted sometime in 2019."

The latest development will likely put pressure on China to resolve its differences with the Trump Administration, according to HighGround Dairy's Lucas Fuess in the October 8 Dairy Radio Now interview. But Fuess tempered the good news of the agreement when considering the time element of its implementation.

When asked what he sees ahead in 2019, Fuess warned that the U.S. milk supply "continues to exceed expectations and as long as we have a fair amount of milk and a steady supply of product the upside is a bit limited and I think we're range bound for the time being."

Meanwhile, the National Milk Producers Federation, the U.S. Dairy Export Council and the International Dairy Foods Assn. praised Trump administration negotiators in a joint press release "for fighting hard against Canada's trade-distorting practices." The groups stated that they "look forward to reviewing the text of the USMCA, in particular the dairy provisions, to better understand the benefits to U.S. agriculture and dairy."

The September Federal order benchmark milk price, announced Oct. 3 by the USDA, jumped $1.14, to $16.09 per hundredweight, 27 cents below September 2017, but the highest Class III price since November 2017. It equates to $1.38 per gallon, up from $1.29 in August but down from $1.41 a year ago.

Last Friday morning Class III futures portended an October price at $15.81, November at $16.03 and December at $15.95 per.

The nine month Class III average stands at $14.62, down from $16.12 a year ago and compares to $14.38 in 2016.

The September Class IV price is $14.81, up 18 cents from August but $1.05 below a year ago. Its nine month average hit $13.95, down from $15.51 a year ago and compares to $13.65 in 2016.

The Oct. 2 Global Dairy Trade auction took the new trade agreement in stride but the GDT's weighted average of products offered dropped 1.9 percent, after slipping 1.3 percent Sept. 18 and .7 percent on Sept. 4. Product was abundant as sellers brought 92.6 million pounds to the sale, up from 86.3 million in the last event and the highest total this year.

The declines were led by butter, down 5.9 percent, after it inched .1 percent lower in the last event. Anhydrous milkfat followed, down 4.4 percent, after a .6 percent loss last time. GDT Cheddar was down 1.2 percent, following a 3.5 percent plunge, and skim milk power was off .3 percent, following a 1.1 percent decline.

Buttermilk powder was up 3.6 percent. It did not trade last time, and rennet casein was up 3 percent, following a 1.7 percent uptick. Lactose inched up .6, after it slipped.3 percent last time.

FC Stone equates the GDT 80 percent butterfat butter price to $1.7772 per pound U.S. CME butter closed last Friday at $2.29. GDT Cheddar cheese equated to $1.5732 per pound and compares to last Friday's CME block Cheddar at $1.65. GDT skim milk powder averaged 89.88 cents per pound and whole milk powder averaged $1.2489. CME Grade A nonfat dry milk closed last Friday at 86 cents per pound.

You'll recall that August 50-State milk production hit 18.3 billion pounds, up a more than expected 1.4 percent from August 2017. USDA's latest Dairy Products report, while generally not a market mover, shows where the milk went.

August cheese output totaled 1.08 billion pounds, down .7 percent from July but 2.8 percent above August 2017. Year-to-date output now stands at 8.57 billion pounds, up 2.4 percent from this time a year ago. August was the 65th consecutive month that cheese output exceeded that of a year ago.

Wisconsin cheese output slipped to 283.1 million pounds, down .6 percent from July but .5 percent above a year ago. California contributed 209.4 million pounds, down .8 percent from July but .3 percent above a year ago. Idaho provided 76.8 million pounds, down 10.4 percent from July but 6.7 percent above a year ago. Minnesota, with 60.1 million pounds, was down 1.4 percent from July but 2.3 percent above a year ago. New Mexico produced 75.3 million pounds, down .2 from July but a whopping 28.4 percent above a year ago.

Italian cheese totaled 454 million pounds, down 2.1 percent from July but 3.9 percent above a year ago. YTD Italian is at 3.7 billion pounds, up 2.6 percent from a year ago. Mozzarella, at 356.2 million pounds, was up 6.1 percent from a year ago, with YTD at 2.85 billion pounds, up 3.3 percent.

American type cheese totaled 425.4 million pounds, down 3.5 percent from July but 2.7 percent above a year ago, with YTD at 3.46 billion pounds, up 2.3 percent. Cheddar, the cheese traded at the CME, totaled 304.4 million pounds, down 22 million pounds or 6.7 percent from July but 2 percent above a year ago, with YTD output at 2.5 billion pounds, up .7 percent from 2017.

U.S. churns produced 133.9 million pounds of butter, down .5 percent from July but 2.1 percent above a year ago. YTD is at 1.29 billion pounds, up 3.3 percent.

California butter totaled 41.5 million pounds, down 3 percent from July but 7.2 percent above a year ago. Pennsylvania output, at 5.5 million pounds, was down 19.9 percent from July and 28.7 percent below a year ago.

Yogurt output, at 395.2 million pounds, was off .3 percent from a year ago, with YTD output hitting 2.98 billion pounds, down 2 percent.

Dry whey totaled 79.7 million pounds, down 15.4 percent, with YTD at 701.4 million pounds, up .6 percent. Dry whey for human consumption totaled 78.2 million pounds, down 13.4 percent from July and down 16 percent from a year ago. Dry whey stocks totaled 70.7 million pounds, down 5.8 percent from July and a whopping 27.9 percent below those a year ago.

Nonfat dry milk production totaled 122.9 million pounds, down 14.8 percent from July and 10.1 percent below a year ago. YTD output stands at 1.2 billion pounds, down 1.2 percent. Stocks fell to 275.4 million pounds, down 42.1 million pounds, or 13.3 percent, from July and 37.5 million pounds, or 12.0 percent below 2017.

Skim milk powder production totaled 47.6 million pounds, up .3 percent from July and 6.3 percent above a year ago. YTD skim is at 379.3 million pounds, down 1.0 percent from a year ago.

Cash dairy prices started October strong, then reversed. The block Cheddar climbed to $1.7475 per pound Monday, highest CME price since Nov. 1, 2017, but closed the first Friday of the month at $1.65, down 4 cents on the week and 11 cents below a year ago. The barrels finished at $1.3675, down 1 ½-cents on the week, 37 ¾-cents below a year ago, and 28 ¼-cents below the blocks. There were 21 cars of block traded on the week and 36 of barrel.

American style cheese production is or has already increased, as heavier Fourth Quarter orders are beginning to come, according to Dairy Market News, and inventories are reportedly tight. Some pizza cheesemakers continue to see steady demand. Milk handlers are swamped with calls from cheesemakers. Spot milk prices ranged from Class III to $1.50 over. But the cheese market tone is "puzzled," said DMN. News from cheese producers is generally positive but many are perplexed regarding current prices, particularly the large block to barrel price gap and "how inextricable that chasm is with bearish market sentiment."

Western cheese demand has remains strong. Intakes from retail stores and restaurants have increased and contributed to higher block prices. Mozzarella demand by pizza manufacturers is very active and stocks are starting to tighten. Market players are still concerned with export sales, despite the trade news. Export demand is mixed and some reports suggest that several global customers are looking for alternative buying opportunities. As cheese prices remain steady to declining in Europe, competition between the EU and the U.S. for market shares increase," according to DMN. Cheese production is generally steady to increasing due to many plants running at or close to full capacity. Cheese stocks are sufficient to meet customer need however, some industry players state that their inventories are fully committed for the rest of 2018.

Cash butter climbed to $2.3350 per pound Tuesday, highest since Aug. 15, 2018, but closed last Friday at $2.29, down 3 cents on the week and 5 cents below a year ago, with a hefty 50 cars trading hands on the week at the CME.

"Butter producers are still going lighter on the churns," said DMN, "as cream availability is slighter than some expected this time of year. Milkfat is reportedly slight, along with other components." Salted butter loads are moving, while unsalted inquiries have quietened. Butter markets continue on a steady path and some contacts suggest that butter prices could reach 2018 highs this fall.

Western butter production is brisk in preparation for the fall season. Cream supplies are sufficient. Butter manufacturers report food service orders have remained strong and retail orders are building.

Grade A nonfat dry milk inched up to 88 cents per pound Monday but closed Friday at 86 cents, down 1½-cents but 3½-cents above a year ago on 6 sales

The spot dry whey market continued to reach new highs and closed Friday at 56¼-cents per pound, up 1¼-cents on the week.

"The dairy market has been fairly steady the past two weeks," according to the latest Margin Watch from Chicago-based Commodity & Ingredient Hedging LLC., "as the fundamentals have been throwing around some mixed signals."

"Milk production in August was stronger than expected, estimated to be 18.3 billion pounds, a 1.4 percent gain over last year. Production was 1.2 percent higher in California, even though the herd size dropped by 12,000 head. Nationally, however the number of milk cows on farm dropped by 4,000 head."

"Cold Storage figures for butter and cheese indicated monthly draws, but were higher on a yearly comparison by 3.8 percent and 1.9 percent respectively. Record inventories of cheese dissipated on a monthly basis by 3.8 percent, nearly doubling the average July through August draw of 2 percent over the past 10 years. Butter supplies were lower by 8.6 percent, not quite meeting the average July through August pace of 10.5 percent over the same period."

"The corn harvest is 26 percent complete, ahead of the 5-year average of 17 percent, but pesky rains throughout the belt will slow progress as fields dry out. The Quarterly Grain Stocks report revealed 2.14 billion bushels of corn as of Sept. 1, above expectations by 138 million bushels, but did represent a drawdown of 7 percent from last year's levels on greater disappearance."

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