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Dairy Producers Aren't Seeing Full Benefit of Growing Margins

by Lee Mielke

Published: Friday, July 31, 2020

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

Dairy farm margins showed "significant improvement in nearby marketing periods over the first half of July following persistent strength in milk and renewed pressure in feed markets," according to the latest Margin Watch (MW) from Chicago-based Commodity and Ingredient Hedging LLC.

But the MW warned, "While Class III prices have surged due to strength in cheese, dairy producers unfortunately have not been able to take full advantage as milk checks from processors are reflecting extremely negative Producer Price Differential (PPD) values due to the low price of the Class I Mover, which will likely continue to generate negative PPD's in upcoming months as well."

"Another aspect of the margin improvement is that it is very front-loaded with nearby milk contracts soaring while strength in deferred months has been more subdued," the MW stated. "Much of the support is tied to strength in cheese which has been propped up by government buying in coronavirus food support programs."

The MW also warns that government programs are "helping to provide immediate support," but "federal spending is expected to drop sharply in October when the current fiscal year ends. This probably has a lot to do with the sharp downward slope of the forward futures curve on Class III milk. Another explanation is tied to expectations that milk production will ramp back up following the sharp decline we saw in May," the MW concludes. And regarding feed, the MW stated, "All of the risk premium in both corn and soybean meal has come out of the market following the surprise surge tied to the USDA acreage report at the end of June."

The USDA announced additional cheese purchases under Section 32 authority last week of $24.7 million for 8.22 million pounds for delivery Aug. 16 through Nov. 30. It equates to $3.01 per pound but that includes costs to convert 40-pound blocks into chunks and shreds as well as freight. It was also noted there was a 240 truckload shortfall in the last announcement due to no offers.

Butter reversed the gears in last week's Global Dairy Trade auction, ending four sessions of gain. Last week's weighted average was down .7 percent, after jumping 8.3 percent on July 7, 1.9 percent on June 16, and .1 percent on June 2. Sellers brought 52.9 million pounds of product to market, down from 56.6 million on July 7.

Butter fell 4.9 percent, after it gained 3 percent on July 7. Anhydrous milkfat was down 2.8 percent, following a .2 percent slippage last time, and lactose was off 2.5 percent. Skim milk powder was off .5 percent, after gaining 3.5 percent.

Whole milk powder was up .6 percent, after leading the gains in the last event shooting up 14 percent, and GDT Cheddar was also up .6 percent, following a 3.3 percent rise.

StoneX equated the GDT 80 percent butterfat butter price to $1.5636 per pound U.S., down 8.1 cents from the last event. CME butter closed last Friday at $1.73. GDT Cheddar cheese equated to $1.7248 per pound, up 1.8 cents, and compares to last Friday's CME block Cheddar at $2.54. GDT skim milk powder averaged $1.2154 per pound, down from $1.2219, and whole milk powder averaged $1.4595, up from $1.4553. CME Grade A nonfat dry milk closed last Friday at 99 cents per pound.

USDA's Dairy, World Markets, and Trade report issued this week says the outlook for U.S. dairy exports has "brightened considerably." "Exports through May reached $2.7 billion, an increase of 12 percent over the same period in 2019," the report stated. "U.S. shipments of skim milk powder (SMP), dried whey and whey products, and lactose through May were up 17 percent, 16 percent, and 10 percent, respectively year-over-year (YOY). On a value basis, exports of SMP through May were up 38 percent YOY and accounted for nearly a third of total dairy exports."

The boost in exports was aided by "the strong competitive position of the U.S. versus EU SMP prices," according to the report, "with a differential that was at times over $250 per metric ton, or 11 cents per pound. U.S. SMP continues to hold a competitive edge and prospects for continued growth in SMP exports for the balance of the year are positive. Currently, total U.S. SMP exports are forecast to reach a record 777,000 tons; up 11 percent from 2019," according to the trade report.

Looking "down under," the report says "after two years of drought, milk production in Australia is set to rebound due to beneficial rains early this year that improved pasture conditions and reduced fodder and grain prices."

"Monthly milk production in New Zealand through May 2020 is marginally ahead of last year's pace over the same period as drought conditions early in the year in the North Island reduced pasture growth and milk output. However, conditions have improved and the latest update from the New Zealand National Institute for Weather and Atmospheric Research does not indicate any current drought."

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