Rising Corn Prices Putting the Squeeze on U.S. Dairy Farmers
Published: Friday, May 7, 2021
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
U.S. dairy farmers are feeling the squeeze. Average feed costs are up more than $5 per hundredweight compared to a year earlier, according to the April 23 Dairy and Food Market Analyst. "A low-cost dairy farmer that broke-even at $15 per hundredweight milk in 2020 will now need $20 to make money," the DFMA stated. "That means many milk producers, especially those that are buying spot feed and are receiving a milk price that is close to Class IV, are deep in the red."
We talked about it in the May 3 Dairy Radio Now broadcast with StoneX dairy broker Dave Kurzawski, who said the Class III milk price was keeping up "so far," and butter, and nonfat dry milk particularly, are helping the Class IV market.
"Milk is liquid corn at some point," he said, "and it's going to matter that corn prices, as we speak, are over $7 on the old crop May contract and we haven't even gotten into the growing season yet. We have weather ahead of us as well as other demand issues, anything can come out of the woodwork and change the market tempo and tenor at any given time. It's going to be a challenging year for dairy producers on the feed side," he warned, "and I think that's going to mean less milk in the second half of the year."
The other unknown is dairy demand. While demand looks good as COVID restrictions allow more restaurants to return to normal, there's a lot of uncertainty as to what government purchases will be.
Kurzawski said that's "the dark cloud in the market right now," with the Food Box program ending May 31. Those purchases will end in mid-May, he said, and will leave a bit of a hole in the market, but he sees continued strong growth in restaurant demand. The administration, however, is looking at increases in the SNAP and WICK programs, and that could mean a weakening for dairy product demand as we enter the second half, according to Kurzawski.
"Just because corn prices are going up, doesn't necessarily mean that the dairy market is going to deliver you an excellent price," he concluded. "It will happen at some point, but there's going to be challenges over the next six to nine months."
CME cash dairy prices ended April stronger for the most part. The Cheddar blocks finished at $1.80 per pound, up .75 cents on the week, 2.50 cents above their April 1 posting, and 59.50 cents above that week a year ago.
The barrels closed last Friday at $1.8350, up 3 cents on the week, 32.25 cents above the April 1 perch, 64.50 cents above a year ago, and 3.5 cents above the blocks. Sales totaled 24 of block on the week and 87 for the month, up from 31 in March. Barrels totaled 12 for the week, with 85 for the month, up from 28 in March.
Cheese market tones are remaining solid, according to Dairy Market News, and Midwestern producers are running active schedules. The spot milk price range ticked higher the previous week and seemed to hold this week, though most contacts suggest there's enough milk to go around. Demand remains strong, but buyers are more hesitant regarding how much cheese they take. Customers are buying on a necessity basis and don't want to get caught holding extra loads if markets shift, although inventories are "generally moving out the door."
The StoneX Group wrote in the April 26 Early Morning Update: "It was surprising to see the spot strength following the bearish milk production and cold storage reports, but looking at how well food service sales performed in March, a solid 10 percent above 2019 levels, it seems as though cheese makers lean on the side of optimism on their cheese sales and are no longer afraid to restrict production."
Cash butter closed last Friday at $1.7525, down 1.75 cents on the week, 9.25 cents lower on the month, but 56.50 cents above a year ago. There were 21 CME sales on the week and 108 for the month, up from 73 in March.
Food service butter demand has ebbed somewhat from a few weeks ago when upticks due to easing of COVID-19 restrictions were boosting demand. Retail demand is lackluster. Butter inventories are generally balanced. Plant managers report that cream was a little tighter but butter market tones are "uncertain."
Cream abounds in the West, but availability may be tightening slightly as ice cream makers pull increasing large volumes of cream. Butter inventories are fairly stable. DMN says food service butter orders "remain on an upward trajectory overall as dine-in restrictions have been relaxing however some contacts expect bulk butter demand to waver a little as some counties are now heightening public activity restrictions in response to rising COVID cases and hospitalizations. Retail butter demand is termed steady, says DMN.
Grade A nonfat dry milk climbed to the highest level it has seen since Oct. 17, 2014, up 7.25 cents on the week and 53.25 cents above a year ago. There were 16 sales on the week, 62 for the month, down from 72 in March.
CME dry whey, after setting the highest price ever the week before, fell back to 64.50 cents per pound last Monday, then pushed higher. It ended the week and the month at 66 cents per pound, up 4 cents on the week and 26.50 cents above a year ago. There were six sales on the week and 17 on the month, up from 14 in March.
African swine fever in China is still a concern, for feed demand, according to StoneX, "but the Chinese government continues to not acknowledge it."
Speaking of China, the April 23 Daily Dairy Report delved into its growing dairy demand, pointing out that, with 1.4 billion people, it is the world's most populous country. But China has been a minimal consumer of dairy products because many Chinese people are lactose intolerant.
The DDR stated that China consumed 77 billion pounds of milk in 2020, which equates to about four month's worth of U.S. milk production, according to a recent USDA Global Agricultural Information Network report. Last year, China's consumption increased 3 percent over 2019, with a similar gain expected in 2021.
"Government initiatives helped drive this remarkable jump in demand," according to the DDR. "The government promoted milk as a healthy food necessary for growth as well as an excellent source of protein," but China will have to rely on imports. The DDR says, "China's land base is limited, and most of its milk is produced in the northern part of the country, also home to the Gobi Desert, the fastest growing desert in the world. Domestically grown feedstocks are also limited, with grains and alfalfa imported, which increases the cost of production."
Writing in the April 23 Milk Producers Council newsletter, the DDR's Sarina Sharp, stated, "China's aggressive purchases have largely cleaned up New Zealand's dairy product stockpile. In Europe, slower milk output has tightened their exportable inventories, particularly for milk powders. January and February European SMP production was 7 percent lower than the prior year, adjusted for leap day. As long as we can secure the containers and ships needed to send product abroad, the U.S. is well-positioned to capture a greater share of the burgeoning market, welcome news because we have a lot of milk to move," said Sharp.
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