DairyBusiness Update: April 4, 2014Print
Was it a Late “April Fools” Thursday at the CME?
The Global Dairy Trade (GDT) auction has dropped three sessions in a row and product prices have plummeted. GDT Cheddar, for example, on Tuesday finished at $2.0130 per pound, while the CME price, Thursday, jumped 3.75 cents, to $2.4225, almost 41 cents above the GDT price and remains the highest priced cheese in the world. Was this a delayed April Fool’s?
FC Stone dairy broker Dave Kurzawski, speaking in Friday’s DairyLine, said it certainly seems that way. The CME block market is a “fresh block market, a young cheese between 4 and 30 days old” Kurzawski explained. “It’s a small sliver of what’s really going on and that market still seems to be very tight.”
That said, Kurzawski expects to see some pushback, both domestically and internationally, plus, he warned that having the world’s highest priced cheese has “put a target on our back” and could potentially attract cheese imports. He adds that barrels are “sluggish” but “a bid could come along just to tighten up the spread,” which is now at 19.25 cents.
When asked how significant the GDT auction is, as some suggest it’s too thinly traded to give much credence to, Kurzawski shot back, “We don’t have a global price index outside of the GDT. That’s our best guess for what’s happening globally.” “You can say what you want about the liquidity on it but, at the end of the day we are looking at the best price discovery mechanism that we have for a global dairy price.”
When asked about butter and powder, Kurzawski pointed out that “powder led the Class III up and powder led the whole dairy complex up but you’re starting to see real weakness on the GDT which was down in both those areas.” Butter was down 11%, he said, skim milk powder was down 9.6%, and whole milk powder was off 8.6%.
“These are some big numbers and the GDT was down 4%, two events ago, then 5.2% in the next event, and down 8.9% on Tuesday. The market is trending lower,” he said. “That doesn’t mean it will always trend lower but it does mean that we have to find a price where buyers are willing to come back in.”
He views the GDT as “the canary in the coal mine” for U.S. prices and he believes U.S. prices will ultimately follow “to some degree.” However, he does not see block cheese plunging to $1.70 but suggests “They’ll come down at some point, perhaps $2, $1.90, or $1.95.”
New Margin Program Offers Better Protection
A report posted on the website of the International Dairy Foods Association (IDFA) says that’s the conclusion of two economics professors who recently published Part III in a series that analyzed the compromise dairy safety net programs now included in the Agriculture Act of 2014, or the Farm Bill.
John Newton, professor at the University of Illinois, and Cam Thraen, professor at Ohio State University, concluded that “dairy producers across the U.S., regardless of location and management style, are better protected against severe downturns in the milk price, rising livestock feed prices or a combination of both” under the new Margin Protection Program, which IDFA endorsed.
The professors warned that “adverse gaming incentives” exist with the program, but they could be mitigated by specifying an earlier sign-up date for coverage decisions.
The paper can be found here:
The Dairy Safety Net Debate Part III: The Compromise Dairy Safety Net Solution
The rest of the series is available here:
“The Land of ‘MILC and Honey’”
“The Dairy Safety Net Debate of 2013 Part I: Questions and Answers”
“The Dairy Safety Net Debate of 2013 Part II: Questions and Answers”
For more information contact, Jerry Slominski, IDFA senior vice president of legislative affairs and economic policy, at firstname.lastname@example.org.
Wisconsin Still the Big Cheese
Wisconsin was/is still the “big cheese” when it comes to manufacturing the tasty treat but total cheese output was down in America’s Daiyland in February, according to yesterday’s Dairy Products report. February output, at 214.96 million pounds, was down 5.1 million lbs. or 2.3% from February 2013 and down 27.5 million lbs. or 11.4% from January 2014.
California output, at 185.6 million lbs. (just 29.4 million lbs. below Wisconsin) was up 10.5 million lbs. or 6% from a year ago but down 19.3 million lbs. or 9.4% from January.
The third largest total cheese producer in February was Idaho, at 61.3 million lbs., followed by New Mexico at 58.7 million, New York at 54.7 million, Minnesota at 51.5 million, and Pennsylvania at 31.2 million lbs.
The Central region produced the most cheese in February, at 378.3 million pounds, followed by the West at 369.2 million, and the Atlantic at 103.1 million lbs.
California’s 4b Price Gap Remains
One of the driving forces motivating California dairy producers to consider forming a Federal Milk Marketing Order in the state is the discrepancy between California’s Class 4b cheese milk prices and the comparable Federal Order (FO) Class III manufacturing grade milk price. The March 4b was announced Tuesday at a record high $22.16 per hundredweight, however, was it $1.17 below the Federal order Class III price. The price gap is a consistent monthly occurrence.
The gap started 2014 at just 84 cents below the FO Class III price, then jumped to $2.21 in February, and that despite the temporary price increases mandated by the California Department of Food and Agriculture, which expire in July 2014.
Last year the January 2013 4b price was $2.30 below the FO Class III, February was $1.84 below, and March was $1.91 below. The difference gap averaged $1.57 in 2013 and ranged from a low of 67 cents in April to $2.30 in January. It averaged $1.91 in 2012 and ranged from 98 cents in June to $2.82 in January. So far in 2014, the gap average is at $1.41.
The Milk Producers Council’s Rob Vandenheuvel has written often about this gap in his member newsletter, charging that dairy producers are “subsidizing” California cheese manufacturers. Cheese manufacturers argue that the price advantage enables them to be competitive, to make up for the distance factor in shipping their cheese.
Will a Federal order solve this issue? Would it put more money into producer’s hands? Would that affect cheese maker’s competitiveness? And, what if it did? Those are some key questions California producers must think about.
Mielke Market Daily/Week’s End Review
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update associate editor Lee Mielke)
The big bang you heard this morning was block cheese falling 7.25¢ after yesterday’s 3.75¢ jump. They landed at $2.35/lb. One car sold at $2.41/lb. but an uncovered offer took the price down further. An uncovered offer rolled the Cheddar barrels 0.5¢ lower, after dropping 2¢ yesterday, and end the week at $2.2250/lb. That put the spread at 12.5¢, down from yesterday’s 19.25¢, but still unsustainable so place your bets; will the blocks tumble more or will the barrels roll uphill or will there be a combination of a little of both?
Many traders expected spot prices to crash once cheese started showing up at the CME but that didn’t happen. At any rate, the Cheddar blocks close today, down 3.5¢ on the week but still 58.75¢ above a year ago. The barrels are down 6.5¢ on the week and 53.25¢ above a year ago. Only one car of block was sold this week and three of barrel. The lagging NDPSR-surveyed U.S. average block price averaged $2.3450/lb., up 8.1¢. Barrel averaged $2.3216/lb., up 4.1¢.
FC Stone dairy broker Dave Kurzawski wrote in this morning’s Insider Opening Bell that the 19.25¢ spot block-barrel spread was “probably causing the bulk of the uncertainty for the Class III market." That spread is the widest since May 2, 2013, he said. “The block price has led the cheese market, and more often than not in the past the barrel price has moved to narrow the spread. An increase in the barrel price could support further nearby Class III gains, he says, but, "There seems to be some cheese freeing up in the country, but not at the exchange."
Class III futures plunged with the May contract shedding 74¢; June, 51¢; & July 32¢.
Butter was unchanged this morning, following yesterday’s 1.5¢ decline, 2.5¢ loss on Wednesday, after gaining 1¢ on Tuesday. It closes the week at $1.97/lb. Two cars were sold today at $1.97/lb. A bid at $1.96/lb. went unfilled and an offer at $1.98/lb. was left on the board.
The Double A price is down 3¢ on the week but is still 26¢ above a year ago. Twelve cars traded hands on the week. NDPSR butter averaged $1.8989/lb., up 4.9¢.
Butter supplies are relatively tight going into the Easter holiday, according to Kurzawski, and “As long as a segment of butter production is earmarked for export, it will keep the market tight going into and probably after Easter."
Cash Grade A nonfat dry milk was also unchanged today, holding at $1.9975/lb. A bid at $1.96/lb. went unfilled.
CME powder is down 3.25¢ on the week. One car was sold this week. NDPSR powder averaged $2.0734/lb., down 1.3¢, and dry whey averaged 66.72¢/lb., up 1.3¢ and the highest since December 2012. By the way, the highest dry whey price ever occurred in April 2007 at 79.33¢/lb.
Kurzawski says Thursday’s Dairy Products report “showed skim milk powder (SMP) output down for the first time since July 2012, signaling a decline in international demand for SMP and a manufacturer shift toward nonfat. Whole milk powder production absorbed some of the disappeared milk from yesterday's report, as it was up 3.1 million pounds or 59.8% in February.”
Today’s Market Closing Prices
Butter: Unchanged, at $1.97/lb.
Cheddar blocks: Down 7.25¢, to $2.35/lb.
Cheddar barrels: Down 0.5¢, to $2.2250/lb.
Grade A nonfat dry milk: Unchanged, at $1.9975/lb.
Class III milk: April $23.94, -29¢ (+15¢ on wk.); May $21.96, -74¢ (+25¢ on wk.); & Jun. $20.56, -51¢ (+9¢ on wk). Based on today’s CME settlements, the Second Quarter 2014 average now stands at $22.15, -52¢ from Thursday. The 2nd half average is now at $19.48, -15¢ from Thursday.
Looking to next week, the Agriculture Department issues its latest Crop Production report on Wednesday along with its monthly World Agricultural Supply and Demand Estimates report, which will include the latest milk production estimate and milk price forecasts. The California Department of Food and Agriculture announces its May Class I milk prices on Thursday, April 10.
Monday on DairyLine:
Penn State dairy economist James Dunn discusses the favorable milk and feed prices
Plus, we tackle the myths surrounding “big agriculture” with Emily Meredith from the
Animal Ag Alliance.
This Week in DairyBusiness Weekly:
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- Plus check out our calendar, industry briefs and more!
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