This Week in Dairy - Lee Mielke

Lee Mielke is a veteran dairy journalist and broadcaster, currently carried in a dozen Ag newspapers nationally.  This column is prepared especially for the readers of DairyBusiness. Based in Lynden, Wash., he can be reached by email or by phone 360.201.4033.

Preliminary USDA data puts February milk output in the top 23 producing states at 15.7 billion pounds, down 1.0 percent from February 2016, however, when adjusting for leap year, output totaled 16.2 billion pounds, up 2.5 percent. The 50-state total, at 17.3 billion pounds, was up 2.3 percent when adjusting for last year’s extra leap day. Revisions lowered the original January estimate 4 million pounds, now pegged at 17 billion pounds, up 2.7 percent from January 2016.

February cow numbers in the 23 states totaled 8.69 million head, up 3,000 from January and 66,000 more than a year ago. Output per cow averaged 1,865 pounds, up 32 pounds from a year ago or 1.7 percent, adjusting for the leap day.

California’s February output slipped below the year ago level for the second month in a row, down 2 percent when adjusting for the leap day. Weather, 21 pounds less per cow, and 15,000 fewer cows were the contributing factors. Wisconsin was up 1.3 percent, with output per cow up 25 pounds, but cow numbers unchanged from a year ago.

Texas continued to “milk it for all its worth,” up 16.3 percent from a year ago, thanks to 40,000 more cows. Output per cow was up 127 pounds but again this is measured against the effects of last year’s Winter Storm Goliath. The other affected state, New Mexico, was up 11.7 percent, on a 130 pound gain per cow and 14,000 more cows.

Michigan milk production was up 4.8 percent, on 11,000 additional cows and 42 pounds more per cow. Idaho also milked 11,000 more cows but saw a 20 pound drop per cow, resulting in just a 0.8 percent increase from 2016.

New York was up 3.8 percent, on a 66 pound gain per cow and 1,000 more cows. Pennsylvania was up 2.9 percent, thanks to a 63 pound gain per cow, but cow numbers were down 5,000 head. Minnesota was up 2.8 percent on a 50 pound gain per cow. Cow numbers were unchanged. Washington was down 2.3 percent, on 2,000 fewer cows, and a weather-caused drop of 30 pounds per cow. HighGround Dairy (HGD) viewed the report as bearish, stating; “Mild winter conditions, high quality feed, and above average income-over-feed margins continue to give producers incentive to drive production growth."

HGD also reported that January marked the eighth consecutive month of year-over-year contraction in EU milk output, which was highly anticipated. “It is not until the second quarter of the year that the industry expects to see a recovery.” HGD adds that, “Even as the herd size is expected to shrink fueled by the Phosphate Reduction Plan in the Netherlands, the European Commission’s economists expect full year 2017 milk production to reflect a gain of 0.6 percent from 2016. The extra milk is expected to flow into cheese and butter while milk powders are expected to show a rather strong loss throughout 2017.”

Speaking of herd size; February dairy cow culling was down from January and a year ago, according to USDA’s latest Livestock Slaughter report. An estimated 253,200 head were

slaughtered under Federal inspection in February, down 15,900 head from January and 3,200 below February 2016, but the data is skewed because of February 2017 having one day less than February 2016.

Hope springs eternal and spring brought a reversal in the March 21Global Dairy Trade (GDT) auction. The weighted average for all products offered was up 1.7 percent, after plunging 6.3 percent March 7 and 3.2 percent on February 21.

Skim milk powder again led the declines, down 10.1 percent, following a 15.5 percent plunge in the last event, and 3.8 percent the time before that. Lactose was down 2.7 percent and GDT Cheddar was down 1.0 percent, after dipping 4.2 percent last time.

Butter led the gains, up 4.9 percent, following a 1.2 percent rise last time. Anhydrous milkfat was up 3 percent, after inching 0.8 percent lower, and whole milk powder was up 2.9 percent, after it dropped 12.4 percent on March 7.

In other trade news, Cooperatives Working Together (CWT) accepted 22 requests for export assistance this week from member cooperatives to sell 3.52 million pounds of cheese to customers in Asia and Oceania. The product was contracted for delivery through June and raised CWT’s 2017 exports to 19.1 million pounds of American-type cheeses and 1.38 million pounds of butter (82 percent milkfat) to 12 countries.

We have plenty of product to sell. The February Cold Storage report pegged U.S. butter stocks at a bearish 282.6 million pounds, up 61.1 million pounds or 28 percent from January and 47 million pounds or 20 percent above February 2016.

American type cheese, at 774.1 million pounds, was up 21.9 million pounds or 3 percent from January and 57.7 million or 8 percent above a year ago. The total February cheese inventory stood at 1.26 billion pounds, up 34.9 million pounds or 3 percent from January and 75.1 million or 6 percent above February 2016.

The Agriculture Department announced the April Federal order Class I base milk price at $16.05 per hundredweight, down 85 cents from March, $2.31 above April 2016, and equates to $1.38 per gallon, down from $1.45 in March. It is the lowest Class I since November 2016 and put the four-month average at $16.78, up from $14.30 at this time a year ago and compares to $16.47 in 2015.

The bears found plenty to feed on this week as spring began, yet cheese prices pushed higher. The Cheddar blocks closed Friday at $1.44 per pound, up 4 cents on the week but 4 cents below a year ago. The barrels finished at $1.39, up 2 1/2-cents on the week and 4 cents below a year ago. Nineteen cars of block traded hands on the week at the CME and 23 of barrel.

With the exception of routine plant maintenance, cheese output in the Midwest is active, reports Dairy Market News (DMN). Contractual milk supplies are generally meeting cheese makers' needs. However, spot offers continue to come in at Class to $3.50 under Class. Pizza cheese producers reported a seasonal uptick in orders. Retail orders are steady to

strong. Some suggest increased advertising and promotions have bolstered orders but cheese inventories are long.

Western cheese production is strong and moving steadily through current agreements. New sales appear to be pulling out of the winter doldrums and a few manufacturers suggest sales have drawn down inventories somewhat but the consensus is that stocks are still long, especially for barrel cheese.

Cash butter shed 3 1/4-cents on the week, pressured by large stocks, and closed at $2.0975 per pound, 12 cents above a year ago. That is the lowest it has been since December 15, 2016 but only five cars were sold on the week at the CME.

Butter production is active across the Central U.S., says DMN. Class II interest in cream has yet to affect butter makers' accessibility. Butter demand is reported as fair to strong and some contacts suggest recent butter related news articles have prompted some uptick in ordering.

Western production is active and stable. Demand is steady in advance of spring holidays, but buyers are expressing little interest beyond immediate needs.

Grade A nonfat dry milk climbed to 84 1/2-cents per pound Thursday but it closed Friday at 82 cents, up 1 1/2-cents on the week and 9 1/2-cents above a year ago. Twenty carloads were sold on the week at the CME, 17 on Friday alone.

Checking the bottom line, the latest Margin Watch (MW) from Chicago-based Commodity & Ingredient Hedging LLC says “Dairy margins deteriorated over the first half of March, particularly in Second Quarter, as a sharp drop in milk prices more than offset lower feed costs during the period. Second Quarter margins are now only slightly above a breakeven level after hovering well above the 90th percentile of the previous decade earlier this year.”

“Although deferred margins remain higher than those in nearby periods, they have also weakened recently,” the MW warned. “Milk prices seem to be under pressure from declining domestic demand following the holidays and Super Bowl.

“Corn and soybean meal futures have sold off following the release of USDA’s March WASDE report, which revealed large production increases for South American crops,” the MW reported. Compared to the February estimates, Brazil’s corn crop was raised 5 million tons to 91.5 million, while their soybean crop increased by 4 million tons, to a record 108 million. Argentina’s corn crop was also raised by 1 million tons to 37.5 million.”

FC Stone says grain markets continue to trade under pressure ahead of the March 31 prospective plantings report. “Weather remains near ideal for South American crops and looking favorable for a good start to our domestic planting.”

In politics, as the drama over repealing and replacing Obamacare took the spotlight, Congress is beginning deliberations on the new Farm Bill. The National Milk Producers Federation (NMPF) president and CEO Jim Mulhern testified before the House Agriculture Committee on March 22 that improving the dairy Margin Protection Program (MPP) must be a top priority.

“While MPP was, and is, the right approach for the future of federal dairy policy, the program in its current form does not provide meaningful safety net support to the nation’s dairy farmers,” Mulhern said, “and a decreasing number have elected to use the program as they saw the program underperforming.”

NMPF has submitted recommendations to change the MPP, including a series of adjustments that will affect the way both feed prices (including corn, alfalfa and soybean meal) and milk prices are calculated.

“The most needed improvement is restoring the feed cost formula to the one originally developed by NMPF,” Mulhern said. “During Congress’s deliberations in 2014, lawmakers implemented a 10-percent cut to the weightings of all three feedstuff components of the MPP feed cost formula, due to what turned out to be an inaccurate budget score from the Congressional Budget Office. The resulting feed formula understates the price to farmers of producing 100 pounds of milk, thereby overstating the actual margins farmers are experiencing,” Mulhern said. “The Agriculture Committee got the calculation right the first time,” he argued, “and thus needs to restore the MPP feed formula to its original level.”

NMPF also asked that Congress direct the Agriculture Department to obtain more precise data for the prices dairy farmers are paying for corn, soybean meal and hay, while also collecting better data for the price farmers receive for milk.

Michael Dykes, D.V.M., president and CEO of the International Dairy Foods Association (IDFA), testified that IDFA’s top priority is to “enhance demand for U.S. dairy products, at home and in the global market,” although they no longer support efforts to ban plant-based products from being labeled as "milk”.

He stated that the FDA nor the courts have concluded that to be misleading “so we think this is probably an issue that needs to be resolved in the marketplace."

He also said the industry needs better mechanisms for risk management on both the farm and processor side. He pointed out that processors could also benefit from better tools to protect against the negative impact of price volatility.

“Just as farmers are now looking to improve the MPP and the Livestock Gross Margin insurance program, dairy manufactures also need access to effective risk management tools,” Dykes said. “Forward contracting has provided an important mechanism for manufacturers to directly contract with individual farmers or their cooperatives at a fixed price to reduce price volatility. This program should now be expanded to include all classes of milk and be made permanent.”

He testified that the global marketplace is “critical,” as that is where the U.S. dairy industry can expect the most potential growth and “Exports are driving growth in demand for U.S. farm milk.”

The Progressive Agriculture Association’s Arden Tewksbury however challenged the assertion that the MPP’s problem lies in the feed adjuster. He charged in a March 23 press release that the MPP “only covers about one-half of the dairy farmers’ costs of operating

their dairy farms.” “What about all the other costs that dairy farmers live with every day,” he asked.

Some of the Congressmen related to the problem of losing dairy farmers in their state, none of them challenged anyone to illustrate what can be done to correct the inequities facing dairy farmers, Tewksbury wrote. He stated that Pro-Ag supports the “Federal Milk Marketing Improvement Act,” previously introduced by the late Senator Arlen Specter and Senator Robert P. Casey, Jr.

Lastly; Western United Dairymen (WUD) reports that the California Department of Food and Agriculture (CDFA) will hold a meeting April 4 in Modesto to gather information regarding quota and how it may operate within a California Federal Milk Marketing Order, if producers vote to approve one.

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