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DairyBusiness Update: August 19, 2014

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Tsunami Warning: July Milk Production JUMPS 4%
   The Agriculture Department’s preliminary data issued this afternoon in its latest Milk Production report, shows July milk output in the top 23 producing states at 16.39 billion pounds, up 4 percent from July 2013. The 50-state total, at 17.45 billion pounds, was up 3.9 percent from a year ago. Sequestered 2013 data was reinstated in the July report.
   Revisions added 50 million pounds to the original June 23-state estimate, now reported at 16.2 billion pounds, up 2.3 percent from a year ago.
   July cow numbers in the 23 states, at 8.58 million head, were up 6,000 from June and 56,000 more head than a year ago. The 50-State count, at 9.27 million head, is up 5,000 from June and 37,000 more than a year ago.
   July output per cow in the 23 states averaged 1,911 pounds, up 18 pounds from June, 61 pounds above July 2013, and the highest production per cow for the month of July since the 23 State series began in 2003.

   Selected state data is posted below:

State          Cow #s                        Milk lbs./Cow        State Change vs.’13
Arizona       193,000                       1,960                      +8.9%
California    1.778 mil                      1,980                     +4.4%
Colorado    145,000                        2,135                     +7.6%
Florida        123,000                        1,710                     +5.0%
Idaho          580,000                        2,105                     +4.0%
Illinois           95,000                        1,660                     +5.3%
Indiana       179,000                        1,875                     +6.3%
Iowa           207,000                        1,890                     +1.6%
Kansas       142,000                        1,845                     +5.6%
Mich.          391,000                        2,120                      +8.2%
Minn.          460,000                        1,660                      -0.1%
N Mex.        323,000                       2,130                       -0.1%
New York    615,000                       1,935                      +4.8%
Ohio            266,000                       1,735                      +3.4%
Oregon       123,000                        1,750                      -0.9%
Penn.          530,000                       1,690                      +3.0%
S Dakota       97,000                       1,845                      +2.9%
Texas          470,000                       1,840                      +5.5%
Utah              95,000                       1,940                      +4.5%
Vermont      132,000                       1,730                      +4.1%
Virginia          92,000                       1,585                      +3.5%
Wash.          272,000                       2,070                      +2.9%
Wisconsin    1.270 mil                     1,885                      +3.4%

Global Dairy Trade Average Slips 0.6%
   Today’s Global Dairy Trade (GDT) auction saw the weighted average for all products slip just 0.6%, following the 8.4% drop in the August 5 event, and 8.9% in the session before that. The price index has pretty much seen declines since reaching its high on February 4.
   The downfall today was led by a 12% plunge in skim milk powder, which was down 6.5% in the last event. Cheddar cheese was next, down 7.9%, following a 10.2% decline last time. Buttermilk powder was next, down 2.5%, following a 10.1% loss last time. Rennet casein was off 0.8%, after a 0.7% drop last time.
   On the positive side; butter was up 4.9%, after dropping 9.6% last time. Anhydrous milkfat was up 3.6%, after jumping 6% last time and plunging 10% the time before that. Whole milk powder was up 3.4%, after plunging 11.5% last time and 10.9% the session before that.
   FC Stone reports the average GDT butter price equated to about $1.3334/lb. U.S., up from $1.2703/lb. in the August 5 event ($1.3009/lb. on 80% butterfat, up from $1.2393/lb.). Contrast that to CME butter which closed yesterday at $2.6350/lb. The GDT Cheddar cheese average was $1.5664/lb. U.S., down from $1.6973/lb. The U.S. block Cheddar CME price yesterday was at $2.1850/lb. GDT skim milk powder, at $1.3034/lb. U.S., is down from $1.4804/lb., and the whole milk powder average at $1.2720/lb. U.S., is up from $1.2360/lb. in the last event. The CME Grade A nonfat dry milk price yesterday stood at a two year low of $1.3750/lb.

                                                                                        Source: GDT & INTL FCStone     

Latest Fonterra Action Impacts the GDT
   HighGround Dairy’s Eric Meyer reports that New Zealand based Fonterra removed 3.5% of its 12 month GDT product volume versus its last estimate two weeks ago, the sharpest percentage decline in 11 months. Whole milk powder took a major hit with 40,000MT (6.2%) disappearing from the latest forecast.
   Given the WMP price collapse over the past six months, it is no surprise to see Fonterra shift their mix to achieve the strongest stream returns. However, we believe it is important to note that ZERO volume was removed from the upcoming four trading events meaning that an awful lot of whole milk powder will still be manufactured and sold through the peak season.
   It is HighGround’s view this still paints a bearish picture in the near term. Strong NZX futures and options volume on the down move with increasing open interest supports our argument.
   To read Meyer’s complete pre and post GDT analysis, write him at ericm@highgroundtrading.com.

CWT Ships More Offshore
   Cooperatives Working Together (CWT) accepted 6 requests for export assistance today from Dairy Farmers of America and Northwest Dairy Association (Darigold) to sell 1.964 million pounds (891 metric tons) of Cheddar and Gouda cheese, to customers in Asia, Europe and the Middle East.
   The product will be delivered through January 2015 and raises CWT’s 2014 cheese exports to 82.543 million pounds plus 48.051 million pounds of butter and 19.877 million pounds of whole milk powder to 43 countries on six continents. These sales are the equivalent of 2.054 billion pounds of milk on a milkfat basis.

Butter Dip…It’s Just a Matter of Time
   International butter prices have topped out and are starting to work their way lower, but when is that going to take place here in the U.S.? FC Stone dairy broker Bill Brooks talked about it in Tuesday’s DairyLine.
   “It’s just a matter of time, unless we see some weather related impact out of New Zealand and Australia,” Brooks said. “We have a pretty healthy spread between U.S. butter prices compared to international prices.”
   “It does cause some concern about how low prices will end up either later this year or the end of next spring, as folks bring butterfat into the country to take advantage of difference in prices between our level here and what’s going on internationally,” he said.
   Here in the U.S. we are anticipating a growing dairy herd, with more milk per cow expected. Historically, the higher prices climb, the farther we fall, according to Brooks. At the moment, these butter prices have been a boon to producers, pushing the Class I and II prices higher.
   Cheese prices are also helping the Class III price. We have seen an inverted spread between the blocks and barrels for nearly two months.
   “The block market is more than adequately supplied with fairly heavy trading throughout that period,” Brooks said. “As a result the price has been struggling against the barrel price.”
   We have a bit of displacement in the marketplace between the types of Cheddar that is in demand, which has been challenging for the industry to get their arms wrapped around because of the quick shifts we have seen.
   “With cheese, we haven’t been that out of line with the international market,” he said. “It’s still essentially a domestically driven market.”
   Brooks anticipates less pressure on declining cheese prices compared to what we might expect with butter.

First Half August Dairy Margins Improved
   Dairy margins were mixed over the first half of August, improving in spot Q3 but deteriorating slightly in deferred periods according to the latest Margin Watch from Chicago-based Commodity & Ingredient Hedging LLC. Most of the margin improvement in the spot period was due to strength in nearby milk futures, with both August and
September showing strength since the end of July relative to deferred contracts.    
   Another contributing factor to margin weakness over the past two weeks was a slight rise in feed costs. USDA released the August WASDE report, which was considered somewhat bullish for corn. The yield and production estimates were pegged at 167.4 bushels per acre and 14.032 billion bushels respectively, each coming in below pre-report trade estimates. As a result, projected new-crop ending stocks were only estimated up 7 million bushels from July when the market was anticipating an increase closer to 200 million bushels.
   By contrast, the soy production and yield figures were much closer to industry expectations and thus considered neutral. While nearby milk prices remain firm, deferred contracts appear to be coming under some pressure. According to the verbatim text of the August WASDE report, milk production forecasts for 2014 and 2015 were raised slightly as lower feed costs are expected to support higher output per cow. Fat basis export forecasts for 2014 and 2015 are lowered as Russia's ban on imports from a number of dairy exporting countries will likely increase competition in export markets. While the U.S. has not had significant dairy export sales to Russia in years, the EU has and they most likely will move to compete more aggressively against the U.S. into the Middle East and Asia. With forward margins remaining above the 90th percentile of the previous 10 years into 2016, our clients continue to scale into deferred margin protection with flexible strategies that can benefit from a potential improvement in margins over time. A continuation of low implied volatility in options is making flexible strategies more attractive for dairy producers.
   For additional details and information on their fall/winter seminars, log on to www.cihmarginwatch.com.

Questions to be Answered on Dairy’s New Margin Protection Program
   The U.S. Department of Agriculture (USDA) is expected to announce the final details of the new “Margin Protection Program” (MPP) in the very near future. The Milk Producers Council’s Rob Vandenheuvel spells out those questions in his Friday member newsletter.
• What the enrollment period is for dairies.
• Whether the program is operated on a calendar year basis or fiscal year basis (like the Oct 1 – Sept 30 calendar for
  the MILC program).

• Exactly how “new producers” will be defined and how dairies that change locations will be handled.
• How much of your production will be eligible for the lower premium.
• How your premiums will be paid.
• Whether you actually have to produce the milk in order to be eligible for the payouts.
   Once we have the final details of how the new program operates, MPC and many other organizations/cooperatives will be helping to educate the producer community on not only how the program works, but how to evaluate what may be the best option for your dairy.
   In the meantime, there’s a fantastic tool available online that I’d recommend every dairy producer check out. We’ve published a link to this tool in previous issues of the newsletter, but it’s worth another mention. It can be found at: http://www.farmdocdaily.illinois.edu/tools/flash_dairy_dashboard_010514.html.
   It makes some assumptions about how the premiums will be calculated, but does a great job of providing a historical look at how the MPP would have operated in any of the past 14 years.
   In order to use the tool, you’ll need to enter a couple things:
• Your dairy’s annual milk production (and remember that the MPP uses the highest annual production of 2011, 2012 or
   2013 for your production history, so that is the 
number you would enter)
• The percentage of your production you’d like to participate in the program (from 25-90%)
• The level of milk-price-over-feed-cost margin you’d like to set for your participation (from $4-8/cwt)
   With that information entered, you can look at individual years from 2000 through 2013 to see: (1) what the premiums would have been for your dairy, which would be the same regardless of year; and (2) what the net payout would have been, which varies by year, depending on the national average milk prices/feed costs.
   As an example, if you entered 25,000,00 lbs of annual milk production (about the production of a 1,000 cow dairy), and entered that you’d like to cover 90% at a $6.00 per hundredweight margin, you’d see that:
• Your dairy would be required to pay a premium each year of $0.14/hundredweight, or about $31,673.
• In 2009, the program would have had a net positive return of $1.64/hundredweight, or $375,782 spread out over the year
  (that’s a net figure, so you actually would have 
received over $400,000, but had to pay $31,673).
• In 2012, the program would have had a net positive return of $1.04/hundredweight, or $238,273 spread out over the year
  (again, that’s a net figure).

• In the other years, there would either have been no payout, or a negligible payout.
  
So while the past is not a perfect indication of the future, this tool can give you some valuable information about how a particular margin level would have operated under conditions that every dairymen vividly remembers – the devastating wrecks of 2009 and 2012. And that’s really what the program is designed for, to provide catastrophic margin protection.

Mielke Market Daily 
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update Associate Editor Lee Mielke)
   Cash traders, after eyeing this morning’s Global Dairy Trade and anticipating this afternoon’s July Milk Production report, took the 40lb. Cheddar blocks up 2.5¢, after they dropped them 3.5¢ yesterday on an offer. They now mirror the 500lb. barrel price of $2.21/lb., which was unchanged this morning again, with no activity. Four cars of block were sold, the first three at $2.1750/lb. but the fourth was at $2.20/lb. An unfilled bid took it to $2.21/lb. and an offer at $2.23/lb. was left uncovered.
   Class III futures liked the turnaround. The Sept. contract was up 42¢, Oct. + 52¢, Nov. +30¢, & Dec. +25¢.
   An unfilled bid took the butter back up. The uptick in GDT butter may have spurred the recovery this morning of yesterday’s 2.5¢ decline and put the spot back at $2.66/lb., a long ways from today’s GDT equivalent of $1.3334/lb. U.S. Nothing traded at the CME, following yesterday’s 16 loads and daily sales last week which totaled 59 carloads. An offer at $2.69/lb. had no takers.
   FC Stone risk management consultant Chris Hildebrand wrote in this morning’s Insider Opening Bell that; "Although U.S. butter has traded by its own rules over the past several months, it will again be important to watch GDT to see what global fat prices do. For now, the U.S. market should continue to be well supported as bulk cream appears to be in short supply for manufacturers."
   Cash Grade A nonfat dry milk saw a 12th session of loss, as two offers took it down another 1¢, following yesterday’s 2.25¢ descent, and is now trading at $1.3650/lb. A bid at $1.3225/lb. was left on the board.

Today’s Market Closing Prices 
Butter: Up 2.5¢, to $2.66/lb.
Cheddar blocks: Up 2.5¢, to $2.21/lb.   
Cheddar barrels: Unchanged, at $2.21/lb.
Grade A nonfat dry milk: Down 1¢, to $1.3650/lb.  
Class III milk (prelim.): Aug. $22.18/cwt., +8¢; Sept. $22.85, +42¢, Oct. $21.46, +52¢; Nov. $20.01, +30¢; & Dec. $19.21, +25¢. Based on today’s CME settlements, the Fourth Quarter 2014 average now stands at $20.23, +36¢ from Monday. The First Quarter 2015 average is now at $18.18, +14¢ from Monday. The Second Quarter 2015 average today stands at $18.05, +13¢ from Monday.

-----
Looking ahead:
   The Agriculture Department announces the September Federal order Class I base milk price tomorrow afternoon and the weekly National Dairy Products Sales Report is issued. The monthly Livestock Slaughter report issued Thursday and preliminary data from the July Cold Storage report is issued Friday afternoon.

  --- 
Wednesday on DairyLine:
   Grab opportunity, but prepare for uncertainty. Stewart Peterson’s Scott Stewart
            explains.
   Gary Sipiorski, from Vita Plus, says “Pay down your payables!” He tells us why in
            PDPW’s “Your Bottom Line” segment.

http://dairyline.com/wednesday.mp3

 

 

 

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