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Dairy, Food Analyst Optimistic in Midst of Trade War Leftovers


by Lee Mielke

Published: Friday, January 11, 2019

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

The December Federal Order Class III benchmark milk price was announced by the Agriculture Department at $13.78 per hundredweight, down 66 cents from November and $1.66 below December 2017. It equates to $1.18 per gallon, down from $1.24 in November and $1.33 a year ago. It is the lowest Class III price since February 2018 and put the 2018 Class III average at $14.61, down from $16.17 in 2017 and $14.87 in 2016. California's Class 4b cheese milk price averaged $15.20 in 2017 and $14.27 in 2016.

Late morning Jan. 4 Class III futures portended a January price at $14.28; February, $14.72; and March at $15.14, with a peak at $16.75 in September.

The December Class IV price is $15.09, up 3 cents from November, $1.58 above a year ago, and the highest Class IV price since September 2017. It averaged $14.23 in 2018, down from $15.16 in 2017 and compares to $13.77 in 2016.

The four-week average cheese price used in calculating the month's Class prices was $1.3742 per pound, down 7.2 cents from November. Butter averaged $2.2425, down 2½ cents, nonfat dry milk averaged 90.2 cents per pound, up 1.6 cents, and dry whey averaged 46.85 cents per pound, up fractionally.

The first Global Dairy Trade auction (GDT) of 2019 saw its weighted average of products offered jump 2.8 percent, following the 1.7 percent rise on Dec. 18 and 2.2 percent on Dec. 4. Sellers brought 63.2 million pounds to market, down from 79.8 million in the Dec. 18 session and the lowest amount since July 17, 2018.

All products offered were in the black, led by buttermilk powder, up 9.3 percent, followed by skim milk powder, up 7.9 percent, which follows a 3.4 percent rise last time. Anhydrous milkfat and butter were both up 3.9 percent, following a 4 and 4.9 percent respective gain in the Dec. 18 event. Cheddar was up 3.2 percent, after a 2.2 percent gain. Lactose was up 1.6 percent and rennet casein was up 1.3 percent. Whole milk powder brought up the bottom, up 1.2 percent, after it inched up .3 percent last time.

FC Stone equates the GDT 80 percent butterfat butter price to $1.8037 per pound U.S., up 6.6 cents from the last session. CME butter closed last Friday at $2.25. GDT Cheddar cheese equated to $1.5289 per pound, up 4.9 cents from the last event and compares to last Friday's CME block Cheddar at $1.4175. GDT skim milk powder averaged 99.82 cents per pound, up from 92.63 cents last time. Whole milk powder averaged $1.2269, up from $1.2129. CME Grade A nonfat dry milk closed last Friday at 97½ cents per pound.

Matt Gould, editor and analyst with the Dairy and Food Market Analyst newsletter, said in the Jan. 7 Dairy Radio Now broadcast that the GDT lends some optimism, even though the dairy industry and others still face the "trade war" left over from 2018. He stated that, while there have been some concessions from China, the retaliatory tariffs from Mexico are still in place.

China lowered tariffs on infant formula and whey products, which is good for global demand, he said, plus trade in general is growing, indicative of that are the shrinking inventories of milk powder in every place where data is available.

"Demand appears to be getting better," Gould said, and both he and the people he talks to are more optimistic than they have been.

Switching to domestic demand, I asked about one of dairy's biggest customers; restaurants. Gould said "2018 was a challenging year economically due to a tight job market which meant higher wages and more turnover of employees so their bottom lines got pinched."

He adds that sales volumes were fairly weak and very weak for the big chains so as they look to 2019. "There's talk of recession and the tight job market remains, which means their costs are high so at least at the restaurant level things look a bit challenging going forward."

Pizza chains were also challenged in 2018, according to Gould, primarily from other convenient fast foods plus, "They face a more competitive 2019 after having really booming years in 2015, 2016 and 2017." In summary, Gould said the domestic situation is "mediocre."

Back on the farm: "Dairy margins were flat over the second half of December with limited movement in the milk and feed markets to close out 2018," according to the latest Margin Watch (MW) from Chicago-based Commodity & Ingredient Hedging LLC. The MW stated that "While nearby margins continue to reflect losses through first quarter, deferred margins are holding up better, with both second and third quarter at or near the 70th percentile of the previous 10 years, and fourth quarter just beneath that level."

"The forward curve continues to reflect optimism over improving fundamentals for milk supply and demand, with deferred futures holding a $3 per hundredweight premium over spot prices based on the September Class III contract. Thawing U.S.-China trade relations are behind some of that optimism as a recent phone conversation between President Trump and Premier Xi reported that tangible progress is being made on some of the more sensitive issues that have blocked previous rounds of talks as negotiating teams prepare for new meetings next week in Beijing."

"Excess cheese production continues to weigh on nearby futures, as cheese output through October exceeded 2017's record-breaking volume by 2.5 percent while U.S. milk production is only up 1 percent from 2017. This preference for directing milk production towards cheese is also being reflected in monthly Cold Storage inventories, as USDA reported November butter stocks at a three-year low of 153.7 million pounds versus November cheese inventories of 1.35 billion pounds which were up 7.5 percent from a year ago. While the October to November draw of cheese inventories was larger than average, overall cheese inventories remain abundant which will put additional emphasis on demand improvement in 2019," the MW concluded.

Cheese Prices Soften

The block Cheddar price closed the first Friday of 2019 at $1.4175 per pound, down 1¼ cents on the New Year's holiday shortened week and 7¾ cents below a year ago. The barrels closed at $1.3025, up 1¼ cents on the week, 8¾ cents below a year ago, and 11½ cents below the blocks. Two cars of block were sold on the week at the market of last resort and four of barrel.

The markets will have less to digest in terms of USDA reports due to the partial government shutdown so rumors and speculation will play a bigger role. The November Dairy Products report, scheduled for Jan. 3, was the next casualty, following the loss of the Ag Prices report on Dec. 27.

U.S. cheese markets were termed "quiet" by Dairy Market News. Contacts in the Midwest report that a number of plants are down for various reasons, particularly maintenance issues. Plant managers who had a smooth holiday run are now on increasingly busy schedules, some scheduling seven-day workweeks.

Milk was heavily discounted over the Christmas weekend and into New Year's week, with prices ranging $2 to $4 under class, although contacts suggest that late Christmas week brought even lower prices. Some cheesemakers expect discounts until mid-month, when bottling starts to pick up. Cheese demand has been steady to mixed. Regional pizza cheese producers have remained busy throughout the holiday season, while most other producers have experienced expected seasonal slowdowns.

Western cheese shipments are moving steadily through existing contracts and the occasional spot sale. Mozzarella makers are hopeful for a lift in orders for the upcoming football playoffs and the return of kids to schools. Cheese demand is "a little subdued," says DMN. Block sales have slowed in the wake of the passing winter holidays. Plenty of milk is available and because milk components remain high, cheese yields are strong. Cheese inventories are heavy and DMN warns that it seems unlikely for cheese production to slow much soon, and without a boost in sales, cheese stocks could grow further.

The cash butter price saw last Friday's finish at $2.25 per pound, up 3¼ cents on the week and 1¼ cents above a year ago. Seven loads traded hands on the week.

DMN reports that cream availability for churning was expected to increase but some contacts report that offers are "pouring in." It adds that "untimely maintenance issues have held some Midwestern butter production back, hence other plants are seeing more cream offers at multiples well below recent norms." Food service and retail butter sales continue to be positive to steady year over year but butter inventories are beginning to build for the spring push. "All said, butter markets are holding steady in the first week of 2019, after a bullishly steady 2018," according to DMN.

Cream is readily available in the West and is trading at discounted prices. Most butter plants are running at full capacity as they attempt to clear as much cream to the churn as possible. Bakery sector interest for butter has slowed somewhat but other buyers are getting a head start on replenishing print butter inventories for use later in the year. Spot butter sales are light however prices remain mostly stable. Some connections report that current prices are "higher than anticipated."

Spot Grade A nonfat dry milk closed last Friday at 97½ cents per pound, up 3¾ cents on the week, 29½ cents above a year ago, and could top $1 per pound for the first time at the CME since January 2017. Five carloads were sold New Year's week at the CME.

The spot dry whey price was up a penny on the week, closing last Friday at 49 cents per pound, with only one car selling in the four days of trading.

With the start of another new year, I remind readers of some points on milk pricing. In most of the USA, California now included, milk prices are determined using complex formulas by the U.S. Agriculture Department, but the system has evolved over the years from a simple volume/butterfat basis to the current multiple component pricing, which takes into consideration volume, butterfat, protein and various other components of the milk, as well as where the milk is to be used.

Milk Math

There are four classes of milk; Class I is fluid in the bottle or jug and yields the highest rate of return to farmers. Class II is milk used in ice cream, yogurt and cream cheese. Class III is milk that goes to cheese and dry whey, and Class IV is milk used in butter, nonfat and whole milk powder.

It takes 9.6 pounds of milk to produce a pound of cheese, so every penny movement in the cheese price equates to about 10 cents on the Class III milk price.

Dry whey is a byproduct from making cheese. One hundred pounds of milk will yield about 10 pounds of cheese and 6 pounds of dry whey. A 1-cent movement in the dry whey price equals about 5.9 cents on the Class III milk price.

The Class IV milk price is driven by powder and butter. One hundred pounds of milk yields about 8.6 pounds of nonfat dry milk and 4.2 pounds of butter.

A penny movement on the nonfat dry milk price means about 8.6 cents on the Class IV price and a penny movement on butter results in a 4.2 cent impact on the Class IV price.

Dairy farmers receive a uniform or blend price, which is determined by their region of the country, based upon how much of that farmer's milk went into the four different classes in his or her milk market order. That is a simplified "Cliff Notes" perspective. Call your cooperative for complete details.

Milk production trends across the county Christmas week were basically unchanged from the previous week, according to the USDA's weekly report. "Farm level milk output in the Western and Central U.S. is increasing at moderate rates, while Eastern milk output continues to be mixed. Milk distribution over the holiday weekend was busy. No major issues were noted as handlers dropped off loads at intake plants and processors accommodated, operating at/near full capacity in some instances."

"Surplus milk offerings increased into cheese operations while at other times, the only option was to move volumes into neighboring states. Heavier condensed skim supplies were on the market as processors' needs slowed, prompting increases in dryer schedules around the country. Cream is readily available and considerable quantities cleared to butter plants."

Lastly, the International Dairy Foods Assn. has consolidated the governance of its constituent organizations, as of Jan. 1. The Milk Industry Foundation, the National Cheese Institute and the International Ice Cream Assn. are now under one central organization, IDFA.

"As the preeminent advocacy and membership-driven organization supporting the dairy foods business, the IDFA has worked for the last 30-plus years to advance and protect our industry, while acting as a trusted advocate for our members' regulatory, legislative and communications needs," explained Michael Dykes, D.V.M., president and CEO. "Like our industry, however, the needs of dairy processing companies and suppliers are changing and growing. As our industry and the needs of our members evolve, so must IDFA."

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