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Views and opinions: Weak milk prices cause decline in dairy margins

 

Dairy margins have declined since the end of October following further weakness in milk prices that was only partially offset with lower projected feed costs, according to the latest Margin Watch (MW) from Chicago-based Commodity & Ingredient Hedging.

The MW said, “Margins through the first half of 2018 are below breakeven and only about average from a historical perspective, while deferred Third Quarter margins are projected slightly above breakeven.”

It warned that “Milk prices remain under pressure from increased output both in the United States and other major exporting countries as global demand is having trouble keeping up with rising supply. EU production during September totaled 27.2 billion pounds, up 4.1 percent from 2016 and the largest monthly increase in year-over-year growth since March 2016. Milk production in New Zealand is also starting to recover after cold, wet conditions made for a poor start to their spring flush. October milk production totaled 3.12 million MT, up 2.7 percent from 2016.”

“Feed prices have moderated further,” the MW reported, “with corn futures dropping to new lows following a bearish November WASDE report. USDA raised the yield projection to 175.4 bushels per acre, up 3.6 bushels from October and above the range of projections of between 170-174 bushels per acre.

“As a result, total corn production was pegged at 14.578 billion bushels, up 298 million bushels from last month and also outside the range of pre-report estimates of between 14.127 and 14.459 billion. Corn ending stocks are now projected at 2.487 billion bushels, as compared to 2.34 billion last month. By contrast, the soybean balance sheet was relatively neutral compared to corn, and as a result, soybean meal prices have held steady over the past couple weeks.”

Penn State’s monthly Dairy Outlook also had some somber comments to its constituents. “If price forecasts for 2018 are realized, the majority of Pennsylvania dairy producers will need to have a cost of production below $17.50 per cwt. in order to cash flow for the year,” the report said. “This fact poses a significant challenge to a number of our state’s dairies, especially as some have delayed equipment reinvestment and repairs hoping for better years.”

The USDA’s latest Crop Progress report shows 90 percent of U.S. corn has been harvested as of the week ending Nov. 19. That’s up from 83 percent the previous week, but 6 percent behind a year ago and 5 percent behind the five-year average.

The report shows 96 percent of the soybean crop is harvested, up from 93 percent the previous week, 2 percent behind a year ago, and 1 percent behind the five-year average. Cotton is 74 percent harvested, up from 64 percent the previous week, 8 percent ahead of a year ago, and 2 percent ahead of the five-year average.

U.S. milk output increasing

U.S. milk output was above that of a year ago for the 46th consecutive month in October and totaled 16.7 billion pounds in the top 23 states, according to preliminary USDA data, up 1.5 percent from October 2016. The 50-state total at 17.8 billion pounds was up 1.4 percent. Revisions lowered the Sept. 23 state estimate of 9 million pounds to 16.2 billion, up 1.1 percent from a year ago.

October milk cow numbers totaled 8.74 million head in the 23 states, down 1,000 from September but 67,000 more than a year ago. The 50-state total, at 9.4 million head, was unchanged from September but 65,000 above a year ago. Output per cow averaged 1,917 pounds in the 23 states, up 13 pounds.

California continued to trail its previous year output for the 10th consecutive month, down 1.5 percent, due to 13,000 fewer cows milked and a 15 pound loss per cow. Wisconsin made up the shortfall, up 2.3 percent, on a 45 pound gain per cow. Cow numbers were unchanged from a year ago.

Arizona showed the biggest gain, up 6.6 percent, with Texas not far behind at 5.3 percent, thanks to 25,000 more cows and a 5 pound gain per cow. Idaho inched up 0.2 percent, on 4,000 additional cows but output per cow was off 10 pounds. Michigan was up 3.3 percent, thanks to a 40 pound gain per cow and 6,000 more cows. Minnesota was up 2.9 percent on a 65 pound gain per cow, but cow numbers were down 4,000 head.

New Mexico was up 1.2 percent, despite a drop per cow of 25 pounds, but there were 13,000 more cows milked. New York was off 0.1 percent on a 15 pound loss per cow but cow numbers were up 4,000. Pennsylvania inched 0.7 percent higher on a 15 pound gain per cow offsetting a loss of 1,000 cows. Washington State was down 0.7 percent on a 15 pound loss per cow. Cow numbers were unchanged. Most analysts viewed the report as neutral to the market.

Rising milk output and falling prices are pushing more dairy cows to retirement. U.S. dairy cow culling reversed gears in October and was up from September and October 2016. The USDA’s latest Livestock Slaughter report shows an estimated 261,000 head were slaughtered under federal inspection, up 11,400 head from September and 23,800 head above a year ago. Culling in the first 10 months of 2017 totaled 2.497 million head, up 108,000 from the same period a year ago.

The global dairy market isn’t offering the U.S. market much hope and rising global milk production, which I reported on last week, will likely keep the downward pressure on.

GDT celebrates 200th event

The Global Dairy Trade (GDT) celebrated its 200th event on Nov. 21, but its weighted average for products offered saw a 3.4 percent plunge, following a 3.5 percent drop Nov. 7, a 1 percent drop on Oct. 17 and 2.4 percent on Oct. 3.

Rennet casein led the declines, down 12.6 percent, following a 4 percent drop last time. Skim milk powder was down 6.5 percent, after it climbed 1.2 percent Nov. 7. Butter had a 5.9 percent meltdown, after it dropped 3.6 percent last time. Cheddar was down 4.2 percent following a 2.8 percent decline, and whole milk powder was down 2.7 percent after it dropped 5.5 percent.

FC Stone equated the GDT 80 percent butterfat butter price to $2.2763 per pound U.S., down from $2.4412 last time. CME butter closed on Nov. 22 at $2.2225. GDT Cheddar cheese equated to $1.7376 per pound U.S., down from $1.8146 and compares to the Nov. 22 CME block Cheddar at $1.61. GDT skim milk powder averaged 77.14 cents per pound, U.S., down from 82.48 cents, and whole milk powder averaged $1.2603, down from $1.2937. CME Grade A nonfat dry milk price closed Wednesday at 71.25 cents per pound.

Americans continue to chow down butter and cheese supplies. USDA’s latest Cold Storage report put November 30 butter stocks at 219.75 million pounds, down 36 million or 14 percent from September and 8.4 million or 4 percent below 2016. The September estimate was revised 1.1 million pounds lower.

American-type cheese, at 739.3 million pounds, was down 41.2 million pounds or 5 percent from September and only 3.3 million pounds above, virtually unchanged, from 2016. The “other” cheese category showed stocks of 504.2 million pounds, up 2 million pounds from September and 42.3 million or 9 percent above a year ago.

The total cheese inventory stood at 1.27 billion pounds, down 40.2 million pounds or 3 percent from September but 45.5 million or 4 percent above a year ago. Revisions added 2.7 million pounds of American cheese to September’s total and 1.8 million pounds to the other cheese total. HighGround Dairy viewed the report as bullish on cheese and neutral on butter.

Short week for market traders

Talk about “too much information,” CME dairy market traders had a lot to digest in three days, and they closed the Thanksgiving-holiday shortened week with CME block Cheddar at $1.61 per pound, down a penny on the week and 25 cents below a year ago. The barrels finished at $1.6750, up 4.75 cents, 1.5 cents below a year ago, and an inverted 6.5 cents above the blocks.

Eight cars of block were sold those three days and five of barrel.

Cheesemakers in the Midwest were receiving spot milk offers early in the holiday week and expected them to continue through Wednesday, according to Dairy Market News. Spot milk prices range from flat market to $5 under Class.

“Cheese plant managers are facing the challenge of taking on discounted holiday milk loads, while attempting to schedule skeleton crews to work over the holiday,” DMN reports. “Cheese inventories vary, but generally cheese stocks are fairly long. Overall, cheese orders have been steady to slow. Some contacts suggest buyers are waiting for steadying market prices, which have slipped of late.”

“Western cheese makers report steady production and plenty of milk available,” said DMN. “Demand is stable, but not as robust as previous years.” Interest from foreign buyers has picked up as prices have eased on market exchanges.

DMN said, “Exports may play a critical role in maintaining comfortable cheese stocks entering into 2018.”

Cash butter closed Wednesday at $2.2225 per pound, up three quarter cents on the week and 17 1/2-cents above a year ago, with 22 cars exchanging hands.

Central region butter makers reported active production schedules Thanksgiving Week, as cream was readily accessible and “finding its way into Midwestern butter plants from regions across the country,” according to DMN. “Butter sales remain strong late into the busy season, and the butter market tone is holding somewhat steady.”

Western processors also have enough cream for churning and some report that they are in their last weeks of strong butter fabrication for the rest of 2017 and will slow production. Some have stopped making butter until after the holidays while others are actively producing it. Holiday demand is “solid and drawing down butter inventories,” but supplies remain plentiful. Retail stores have increased butter promotions. International market competition between the EU and the USA for market share is increasing, said DMN.

Cash Grade A nonfat dry milk dipped to 70.5 cents per pound Tuesday, lowest price since April 2016, but finished Wednesday at 71.25 cents, down 1.25 cents on the week and 19.25 cents below a year ago. Only two cars sold on the week.

The USDA announced the final Class I base milk price of 2017 at $16.88 per cwt., up 47 cents from November and dead even with December 2016. It is the highest Class I since March 2017 and equates to $1.45 per gallon. The year’s average is $16.45, up from $14.80 in 2016 and $16.34 in 2015.

Cooperatives Working Together (CWT) accepted 17 requests for export assistance Thanksgiving Week from Dairy Farmers of America, Northwest Dairy Assoc. (Darigold) and Tillamook County Creamery Assoc. that have contracts to sell 3.479 million pounds of Cheddar cheese to customers in the Asia, the Middle East and North Africa.

The product has been contracted for delivery through February 2018 and raised CWT’s 2017 export sales to 63.97 million pounds of American-type cheese, and 4.75 million pounds of butter (82 percent milkfat) to 21 countries. The sales are the equivalent of 697.28 million pounds of milk on a milkfat basis.

New EPA study clears cattle

A new study from the U.S. EPA and the Lummi Nation of Washington State shows no evidence that cows are to blame for bacterial contamination in the Nooksack River and Bellingham Bay. A press release from Whatcom Family Farmers states that “The EPA report says no fecal material from cattle was found in DNA testing of the any of the water samples collected. The Whatcom County Health Department also reports significant improvements in water quality that could allow the Lummi’s Portage Bay shellfish beds to re-open for much of the year.

In recent years, bacterial pollution had closed the shellfish beds for most months, but the exact source of the pollution was unclear. Whatcom farmers and the Lummi Nation joined together in 2016 to form the Portage Bay Partnership to push for solutions.

“Water quality is definitely improving, and the results show what we have been saying all along, that the assumption that dairy farms are causing shellfish contamination is simply wrong,” Fred Likkel, Executive Director of Whatcom Family Farmers said.

“Also, a new state Department of Ecology study shows improving groundwater quality in northern Whatcom County. Nitrate levels are declining or remaining steady in all but one of the wells they tested.”

A Nov. 8 Capital Press story on the study quoted an Ecology researcher who said “the study shows manure lagoons and manure-management plans farmers have been using over the last 20 years may be working to improve water quality.”

“We hope those continuing to pursue lawsuits and massive new regulations against our dairy farms will wake up to what the data are saying and stop their false accusations,” Likkel said.

Late breaking for Golden State producers: The California Department of Food and Agriculture extended the Quota Implementation Plan ballot deadline to Friday, Dec. 22. Ballots must be fully completed and postmarked by Dec. 22 to be counted.

 

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Lee Mielke may write to him in care of this publication.

11/30/2017