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China Buying at Record Pace to Drive Dairy Exports

by Lee Mielke

Published: Friday, September 10, 2021

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

It was a week of COVID cases shooting higher across the country. Hurricane Ida attacked the Louisiana coast, plunging New Orleans into darkness and causing flooding in Mississippi, even reaching to New York and New Jersey with rains and flooding. And it was the U.S., in humiliating surrender, leaving Afghanistan after 20 years. With all that on our minds, I endeavor to report the dairy markets.

First, the Agriculture Department announced the August federal order Class III benchmark milk price at $15.95 per hundredweight, down 54 cents from July, $3.82 below August 2020, and the lowest Class III since February. The eight-month Class III average stands at $16.78, down from $17.61 a year ago and compares to $15.83 in 2019.

Last Friday morning Class III futures had the September contract at $16.61 per hundredweight; October, $16.84; November, $17.07; and December at $17.40 per hundredweight.

The August Class IV price is $15.92 per hundredweight, down 8 cents from July but $3.39 above a year ago, and the lowest since April. Its average for the year stands at $15.12, up from $13.62 a year ago, and compares to $16.19 in 2019.

U.S. dairy exports continue to impress, according to HighGround Dairy's Lucas Fuess. Reporting in the Sept. 6 "Dairy Radio Now" broadcast, Fuess said July cheese exports, at 81.1 million pounds, were up 26.8 percent from July 2020, driven primarily by gains into Mexico, but also impressive exports to Japan.

Nonfat dry milk exports, at 160.9 million, were down 3.1 percent, he said, but still on track for another record year over year increase, up 12.7 percent. He emphasized the large increase of NFDM to China, which is buying it wherever it can in recent months. U.S. powder shipments were the highest since March of 2014.

Dry whey totaled 37.3 million pounds, down 8.7 percent, though YTD is up 19.1 percent.

U.S. butter volumes were good as well, though a fraction of the others, he said. Butter totaled 8 million pounds, up 80 percent from a year ago, with YTD exports up an impressive 136.1 percent. Interestingly, the U.S. imported 8.6 million pounds, up 11 percent from a year ago, and cheese imports totaled 37.5 million pounds, up 33.3 percent.

Fuess also reported that Hurricane Ida impacted feed prices after damaging grain export elevators in Louisiana. Power outages may keep them idled for some time.

Dairy exports are one of the key drivers behind a record-high forecast for overall U.S. agricultural exports in USDA's latest Outlook for U.S. Agricultural Trade report, according to the Aug. 31 Daily Dairy Report (DDR).

"The agency increased anticipated agricultural exports for fiscal year 2021 (ending Sept. 30) by $9.5 billion to $173.5 billion," the DDR stated, "while lifting fiscal year 2022 exports by $4 billion to a record-large $177.5."

"Stronger exports of milk powders and cheese to Mexico and Asia motivated USDA to increase its expectations for dairy exports in fiscal years 2021 and 2022 to $7.3 billion and $7.5 billion, respectively," according to the DDR, aided by internationally competitive prices and a weak U.S. dollar.

Those exports numbers are great but don't appear to be transferring into more profitability on the farm. A continued falling All-Milk price and higher corn and hay prices in July were not offset by the drop in the soybean price and resulted in the U.S. milk feed ratio falling again, a descent that started in December, paused in April, but has resumed ever since. The USDA's latest Ag Prices report has the July ratio at 1.55, down from 1.60 in June, and compares to 2.72 in July 2020.

The index is based on the current milk price in relationship to feed prices for a ration consisting of 51 percent corn, 8 percent soybeans and 41 percent alfalfa hay. In other words, one pound of milk would only purchase 1.55 pounds of dairy feed of that blend.

The U.S. All-Milk price averaged $17.90 per hundredweight, down 50 cents from June and $2.70 below the July 2020 average.

California's All-Milk price fell to $18.20 per hundredweight, also down 50 cents from June and $2.90 below a year ago. Wisconsin's, at $17.70, was down 60 cents from June and $4.60 below a year ago.

The national average corn price hit $6.12 per bushel, up 12 cents per bushel from June, and a whopping $2.91 per bushel above July 2020.

Soybeans averaged $14.10 per bushel, down 40 cents from June after falling 30 cents the previous month, but were still $5.60 per bushel above July 2020.

Alfalfa hay averaged $201 per ton, up $2 from June and $29 above a year ago.

Looking at the cow side of the ledger, the July cull price for beef and dairy combined averaged $75.60 per hundredweight, up $1.70 from June, $5.10 above July 2020, and $4 above the 2011 base average of $71.60 per hundredweight.

In the week ending Aug. 21, 59,000 dairy cows were sent to slaughter, down 1,100 from the previous week, but 4,400, or 8.1 percent, above that week a year ago.

StoneX says dairy cow slaughter is currently tracking above the three-year average.

Global milk prices continue to show a competitive advantage for U.S. processors, according to StoneX Sept. 1 Early Morning Update. "Ideally this should continue to translate to export opportunities assuming logistics issues don't continue to impact the market too much. U.S. milk production growth has been slowing as has milk output in the EU. Feed costs continue to be an issue so we expect milk production should be relatively constrained for the remainder of 2021."

Margins Hold Steady

The latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC says, "Dairy margins were unchanged over the first half of August as increases in both milk prices and feed costs were largely offsetting since the end of July." It credited strength in cash cheese prices the past week being supportive of CME Class III futures but warned, "The overall tone of the market remains bearish with spot futures still down around $2.50 from their May highs."

"Milk production remains strong for this time of the year as demand uncertainty lingers from the advancing Delta variant of COVID-19 and indications from Open Table that U.S. restaurants are no longer showing growth in demand, with some significant slowing evident in states more heavily impacted by the current COVID-19 surge. Mobility data similarly suggests a modest slowdown in travel."

The MW cited USDA's decreased forecast in U.S. milk output in the latest World Agricultural Supply and Demand Estimates, but said "The bigger surprise was on the feed side where USDA cut the corn yield projection by 4.9 bushels from July to 174.6 bushels per acre, down 2 million from the average industry estimate."

"The soybean yield was similarly trimmed to 50 bushels per acre from 50.8 in July and likewise below the average pre-report estimate of 50.3 bushels. Both corn and soybean meal pushed higher following the report, and high feed costs continue to raise breakeven prices for most dairy operations which now generally need at least $18 per hundredweight to cover all costs," the MW concluded.

The National Milk Producers Federation's August Market Report says, "Low milk prices and high feed costs, a.k.a. depressed margins, are slowly bringing U.S. milk production back in line with demand. Daily average production was down almost 2 percent from the spring flush high in April, a larger-than-usual drop."

"Futures markets have taken notice," adds NMPF, "ending the long slide in their collective estimate of calendar year 2021 average milk prices beginning in mid-May. Rising cheese prices have been a key driver of this recent recovery." "Although milk production is being channeled disproportionately into American-type cheese, growth in commercial use of such cheese hit double-digit percentages during the second quarter, while use of other types of cheese grew by fully half this amount. Domestic use of milk in all products showed a 1 percent gain, while exports continued their march toward a new record as a percent of domestic milk solids production," NMPF concluded.

Dairy prices at the Chicago Mercantile Exchange started September with butter and powder climbing and cheese and whey falling, as last Friday's traders anticipated the afternoon's July Dairy Products and the long Labor Day holiday weekend.

The 40-pound Cheddar blocks started the week dropping 4 cents but rallied late in the week to close last Friday at $1.7350 per pound, down 1.5 cents on the week and 39 cents below a year ago when they pole vaulted 29.75 cents to $2.1250.

The 500-pound Cheddar barrels lost 3.75 cents last Monday, then recovered some but finished last Friday at $1.3925 per pound, down a penny on the week, 30.75 cents below a year ago when they jumped 27 cents to $1.70, but are 34.25 cents below the blocks. Only four cars of block were sold on the week at the market of last resort, with 23 in the month of August, up from 21 in July. There were 16 sales of barrel on the week and 72 on the month, down from 111 in July.

Midwestern cheesemakers tell Dairy Market News that production schedules remain busy, but staffing shortages are adding stress to a growing number. Regional cheese sales are healthy and pizza cheese producers continue to turn down orders. Mozzarella inventories are tightening. Curd and barrel sales are steady week to week. Regional cheese market movements were more bullish than bearish, says DMN, despite the CME price fluctuations.

Cheese demand remains steady in the West in retail and food service though there is concern about the current surge of COVID-19 cases affecting demand, particularly with food service. Demand remains strong from international purchasers but ongoing port congestion is causing delays. Domestic loads are also facing delays due to a shortage of truck drivers and limited available shipping supplies. Inventories of both barrels and blocks are available, says DMN.

CME butter had a great week, climbing to last Friday's close at $1.7975 per pound, 9 cents higher on the week, highest since June 17, and 30.50 cents above a year ago. Twenty-eight cars were sold on the week and 106 in the month, up from 55 in July.

Butter production remains busy, says DMN, in spite of lighter seasonal cream supplies. Plant managers' reports of staffing shortages are growing and plant schedules would be more routine if it were not for thinly stretched workforces. Cream multiples are a little steeper week to week and some producers are bidding for fourth quarter cream supplies. Butter sales remain somewhat steady. Retail sales have yet to lift, but fall demand upticks are expected near-term.

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