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Dairy Margin Reaches Highest Point of Year, but Still Below 2017

by Lee Mielke

Published: Friday, December 7, 2018

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

A higher U.S. All-Milk price average and some lower feed prices pushed the October milk-feed-price ratio higher for the third month in a row and the highest level since January 2018, but farm margins have since fallen. The Agriculture Department's latest Ag Prices report shows the October ratio at 2.20, up from 2.10 in September but down from 2.47 in October 2017.

The U.S. All-Milk price averaged $17.40 per hundredweight, up 70 cents from September but 70 cents below October 2017. New Mexico again had the low at $15.80, followed by Michigan at $16.50. California, at $16.46, was up 49 cents from September; and Wisconsin was at $17.60, up 20 cents.

The national average corn price averaged $3.41 per bushel, up 2 cents from September and 15 cents per bushel above October 2017. Soybeans averaged $8.58 per bushel, down 19 cents from September and 60 cents per bushel below a year ago. Alfalfa hay averaged $178 per ton, down $2 from September but $25 per ton above a year ago.

The milk-over-feed margin was up 70 cents from September, at $8.96 per hundredweight, based on the Margin Protection Program calculation, highest margin of the year but still $1.17 below a year ago.

Looking at the cow side of the ledger, the October cull price for beef and dairy combined averaged $57.80 per hundredweight, down $3 from September, $7.60 below October 2017 and $13.80 below the 2011 base average of $71.60 per hundredweight.

Cash cheese prices ended November strengthened but still in the cellar. Block Cheddar, after dropping 10¾ cents Thanksgiving week, finished the week after and the month at $1.36 per pound, up 1½ cents on the week but 9½ cents below its Nov. 1 level and 20¼ cents below a year ago. The barrels closed at $1.3150, up 7½ cents on the week, after plunging 12 cents the previous week, but 6 cents lower on the month, 22 cents below a year ago, and 4½ cents below the blocks. There were seven cars of block sold on the week, 71 on the month, plus eight cars of barrel sold on the week; 44 on the month.

Midwest cheese production has slowed, reports Dairy Market News, and some plants are shifting away from barrel production to other varieties, such as curds, or selling milk into bottling. Shredded cheese demand is reportedly strong. Other orders are average to slow, according to a growing number of contacts.

Western cheese prices are low and overall U.S. cheese prices are lower than that of the European Union. Western processors are seeing more demand from the export market, particularly from Mexico. However, the general market undertone seems mixed, as some market players say they have been seeing more pushback on cheese demand. Cheese output remains active as milk is plentiful. Cheese is abundant in the West.

October Cold Storage data was a bit bullish for butter but that didn't do much for the CME price. It closed the week and the month at $2.2425 per pound, down 3¾ cents on the week and 5¾ cents lower on the month, but is 2¾ cents above a year ago when it fell 14 cents. Seven cars sold on the week; 59 on the month.

Butter markets typically see a significant decline this time of year, warned DMN. The difference of the weekly average CME butter market price, between weeks 48 and 52, from 2013 to 2017, was a decrease of 24.15 cents. Contacts are concerned about the potentiality of a large drop-off this year. Cream is becoming more available for butter in the region, although some suggest the momentum is slow to build. Butter inventories are balanced to declining says DMN.

Western contacts say retail sales have been strong and print orders are coming in for the final holiday push. Butter inventories are seasonally lower but butter makers know they will have the opportunity to rebuild stocks after the holidays.

Dairy margins weakened further through the first half of November as lower milk prices more than offset a slight decline in projected feed costs, according to the latest Margin Watch (MW) from Chicago-based Commodity and Ingredient Hedging LLC. The MW stated, "Nearby dairy margins in both spot fourth quarter and first quarter 2019 are now negative with deferred margins in second and third quarters only slightly positive and above average from a historical perspective."

"Milk prices continue to suffer from insufficient demand being able to absorb increased production," the MW warned. "USDA reported October Milk Production of 17.9 billion pounds, up .8 percent from last year despite increased cow slaughter as the remaining cow herd becomes more efficient. USDA reported the October dairy herd at 9.365 million head, down 2,000 from September and 30,000 below last year. The Midwest continues to struggle with milking economics where production shrank last month, while production increases in Western states more than offset those losses."

Penn State's November Dairy Outlook examined the state's dairy industry and reported: "Based on our sample of nearly 100 annual actual cash flow plan analyses, more than 50 percent of dairy farmers reported cash surpluses in 2013 (i.e., gross milk prices above their break even cost). In 2014, while the production costs were reported to be higher than 2013, the increase in gross milk prices compensated for the increase in the production costs and more than 75 percent of dairy farmers in our sample reported gross benefits."

"However, the picture reversed in 2016, where the gross milk prices were below their average levels in 2014 and 2015 in such a way that producers could not benefit from lower costs of production. More than 75 percent of dairy farmers in our sample reported cash losses. In 2016, the increase in the costs of production, accompanied with flat gross milk prices made a dire situation even worse. Almost all of the dairy producers in our sample reported losses in 2016. While the situation got slightly better in 2017 due to a small increases in the gross milk price and lower production costs, more than 50 percent of dairy farmers in our sample reported cash losses," according to the outlook.

University of Wisconsin emeritus professor Robert Cropp and Mark Stevenson state in their latest podcast that "we're range-bound. Dairy markets are prepared to move up a bit and then retreat from those gains in the absence of any strong evidence that milk supplies are tightening or demand is picking up."

The fundamentals wouldn't seem to dictate where cheese prices are today, Stevenson said. They cited abundant cheese output, mixed reports on demand, and tariff-affected export losses as the factors impacting prices.

They also pointed to disappointing global prices as evidenced in the past seven Global Dairy Trade auctions, and stated that weather will be a big factor ahead. New Zealand milk output looks to be very strong, they said, Australia is in drought, and the EU milk output is questionable because of drought.

Cropp believes Class III futures prices are "too soft." He's a little more optimistic but doesn't see "a great rebound in milk prices where farmers like to see them," but should mirror those in 2017, "even though the futures aren't there yet."

HighGround Dairy's director of market intelligence, Lucas Fuess, stated in the Dec. 3 Dairy Radio Now broadcast that the fundamentals look pretty bearish after the holiday season and into 2019. A look at Class III futures underscores that. Prices are below $16 per hundredweight through the first half of 2019, but Fuess says a continued drop in cow numbers could change that.

The last Milk Production report showed numbers continue to tick lower and are well below a year ago. If that continues and milk output slows to levels lower than where they were in 2018, that could indicate a rebound in the making, but "there's plenty of product to work through before that happens," he said.

When asked if the tariff and trade wars are responsible for the depressed prices, Fuess said they certainly contribute to it as it remains difficult to get product into China and, even with the new USMCA agreement, Mexico still has tariffs on some U.S. dairy products, he concluded.

Dairy producers must call on their elected representatives to respond to the financial crisis on U.S. dairy farms, according to Arden Tewksbury, manager of the Progressive Agriculture Organization. Tewksbury charged, "For the last four years, United States dairy farmers have been underpaid nearly $11 billion per year," and he called for three specific actions.

First, lawmakers need to immediately implement a $20 per hundredweight floor price under milk used to manufacture dairy products. Second, agriculture committees need to hold hearings for dairy farmers to testify "how bad things are, and develop a new milk pricing formula which includes the dairy farmer's cost of production." Thirdly, he called for an investigation "to determine if whey and milk protein concentrate products are causing an unnecessary surplus of milk."

"We're losing thousands of dairy farmers each year, and this cannot continue," he writes. "Many other dairy farmers are on the verge of going out of business. Demand congressmen and senators take immediate action," he concludes.

The loss of dairy operations will impact several state economies, according to 10 new videos created by a coalition of dairy organizations and posted on the U.S. Dairy Export Council website. The posting talks of dairy's "ripple effect" to related industries like retailing and manufacturing and "the numbers are eye-opening."

The dairy industry supports more than 390,000 jobs and pumps $98 billion into the California economy alone, the video states. Dairy in Wisconsin creates 215,128 jobs and $62 billion, plus 203,254 jobs and $39.5 billion in Texas. Nationally, dairy supports 2.9 million American jobs, according to the videos.

The data come from "Dairy Delivers", the International Dairy Foods Assn's. economic impact tool, as well as quantitative analysis by the U.S. Dairy Export Council and National Milk. Bottom line, "Dairy creates jobs and exports create more." Other states especially benefiting from the dairy industry include New York, Florida, Pennsylvania, Ohio, Illinois, Minnesota and Michigan.

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