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DairyBusiness Update: August 25, 2014


Meyer Contrasts the Bear with the Bull
   Contrasting last Tuesday’s bearish July Milk Production report was Friday’s BULLISH Cold Storage report for both cheese and butter, says HighGround Dairy’s Eric Meyer. He writes in his analysis that while we have been pounding the table that sharply lower international prices and bearish fundamentals are suggestive the US will soon follow, the fact remains that domestic demand continues to outstrip supply in the near term.
We will focus on current US butter fundamentals in this month’s analysis as they paint a clear bullish picture:July ending stocks are the lowest since 2001

  • The 80 million pound growth in inventory between Jan and May ’14 were the lowest since 2010
  • Jan-Jun ’14 production is DOWN 31.5 million pounds (14,288MT, or -3.1%) versus 2013
  • According to HighGround’s estimates, H1 2014 commercial disappearance is UP 6.6%, or approximately 57 million pounds (25,855MT) versus last year.

   At present, demand has been strong enough to outstrip current US butter supplies. July & August US milk production historically contains the lowest butterfat percentages of the year and according to USDA data, Jan-July ’14 milk fat content is 0.7% BELOW 2013 levels. Milk production seasonally declines through October and demand peaks during the second half of the year. USDA commercial disappearance data shows August as the second highest demand month (all-milk equivalent, 30 day months) on average over the past 10 years (Nov = #1).
  So what will a $2.80+ price do to butter and cream demand heading into the holidays? That is a tough question to answer but since the US market has gone into “demand ration” mode, we believe holiday promotions on butter will likely be minimal and food service/industrial demand has likely gone into reformulation mode. While there has been chatter that the US butter situation may not sort itself out until Q2 2015, we believe the contrary. Imported butterfat will likely hit US ports by early November (Last Fonterra GDT price for Nov delivery = $1.27 per pound; Latest Dutch Dairy Board butter quote = $1.93 per pound, both at 82% fat) and demand will be impeded at the same time milk production continues ramping up.
   While difficult to predict timing or support levels as to where prices may eventually fall, we believe the US butter market is poised for a steep decline by the end of the year. Where will prices go over the next 30-60 days? That is not a question we believe any analyst can answer with confidence.

World Market Wants Low-Fat, U.S. Wants High-Fat
   That is one of the interesting take-aways from recent data reported in Friday’s Dairy Market News. In July, the Economic Research Service published data for the first time on domestic commercial disappearance and commercial exports of dairy products.
   The data show that U.S. dairy exports have soared over the last ten years. Dairy exports, measured on skim-solid basis, have grown fourfold, reaching 38 billion pounds in 2013, up from 9 billion pounds in 2003.
Domestic commercial disappearance, a measure of domestic use, also grew substantially. But while export growth was primarily driven by strong global demand for products with low-fat content such as nonfat dry milk and lactose, domestic consumption was driven by increased demand for products with high milk-fat content such as cheese and butter. The data tables will be updated monthly, with the next update on August 27, 2014. The data tables can be found at http://www.ers.usda.gov/data-products/dairy-data.aspx

Cheese Inventories Not Easily Built
Cheese production is mostly steady, with manufacturers looking to increase stocks, according to USDA’s Dairy Market News. While milk production is slowing seasonally, increased production from retained cows in the milking herd and increased cow numbers have allowed cheese plants to find additional milk for manufacturing. Lower prices for NDM and condensed skim milk are also allowing cheesemakers to supplement vats.
   Demand for cheese from domestic buyers is very good. Buyers are looking to acquire inventories for fall orders and are often finding additional supplies hard to find. Both block and barrel production is often short of current demand. Export demand has slowed, allowing cheese plants to concentrate on domestic orders.

Butter Inventories Not Being Built Either
The butter market tone is firm, according to Dairy Market News, as demand continues to outpace current inventories. Butter manufacturers are generally taking advantage of the high prices versus rebuilding for the upcoming demand. Production rates are mostly steady with a few instances of lower levels. Spot availability of cream varies amongst the regions.

U.S. Milk Production Varies Regionally
   Milk production is seasonally declining in the Northeast, Mid-Atlantic, Southeast, Florida, Pacific Northwest, and parts of California, according to Dairy Market News, while production is holding in the Midwest, Utah, Idaho, and areas of California.
   Various processors note producers are culling less heavily and improving feed rations, which are keeping most areas above prior year milk output volumes. Bottling sales are improving throughout the regions as more schools reopen. Ice cream production varies as the summer is nearing the end. Some processors are diverting milk away from one plant to another in light of market price changes.

 Corn Crop 52% in Good Condition 
   The Agriculture Department’s latest Crop Progress report, issued this afternoon, shows that 21% of the nation’s corn is rated in excellent condition, as of the week ending August 24. That’s unchanged from the previous week and compares to 15% a year ago. Fifty two percent is rated good, up from 51% the previous week, and compares to 44% a year ago. The 18 states which comprised 91% of the 2013 crop and their current rating are listed below:
State                               Week Ending   August 24, 2014
                Very poor           Poor          Fair          Good       Excellent  
Colorado      1%                   5%          23%          51%        20%
Illinois           1%                   3%          14%          52%        30%
Indiana         1%                   5%          21%          51%        22%
Iowa             2%                   5%          18%          51%        24%
Kansas         5%                  10%         30%          42%        12%
Kentucky      5%                  13%         23%          47%        12%
Michigan      2%                    7%          19%         55%         17%
Minnesota    1%                    5%          23%         58%         13%
Missouri        -                       2%          15%         48%         35%
Nebraska     3%                    6%          20%         51%         20%
N Carolina    4%                  11%         24%          44%        17%
N Dakota      1%                    4%         17%          56%         22%
Ohio             1%                    4%          20%         53%         22%
Penn.           1%                    3%          16%         47%         33%
S Dakota      2%                    5%          21%         59%         13%
Tennessee    -                       4%          19%         53%         24%
Texas           1%                    5%          29%         48%         17%
Wisconsin     3%                    8%         21%         47%         21%

   The report shows 83% is in the dough stage, up from, 70% the previous week, 67% a year ago, and 5% ahead of the five year average. Thirty five percent is showing dent, up from 22% a week ago, 21% a year ago but 8% behind the five year average.
   Ninety percent of the soybean crop is setting pods, up from 83% the previous week and 82% a year ago, and is 1% ahead of the five year average. Eighteen percent of the soybean crop is rated as excellent, with 52% rated as good.
   There is 90% of the cotton setting bolls, up from 88% the previous week, up from 89% a year ago, but 3% behind the five-year average. The report shows 19% of the cotton has bolls opening, up from 12% a week ago, 10% a year ago, and 1% ahead of the five year average. The report indicates that 11% of the cotton crop is rated in excellent condition and 40% as good.

California Producer Group Thumbs Down to Milk Pricing Proposal
   California Dairy Campaign (CDC) President Joe Augusto called upon members of the California State Legislature to vote against AB 2730 introduced by Assembly Member Susan Eggman, D-Stockton, and State Senator Christine Galgiani, D-Stockton, and put forward by California Department of Food and Agriculture (CDFA) Secretary Karen Ross that would call for a sweeping and unprecedented overhaul of dairy producer pricing in the state.
   “Few have seen the final language of CDFA Secretary Ross’s bill, AB 2730, and that is by design,” CDC President Joe Augusto explained. “Secretary Ross is waiting until the final days of the California State Legislative Session to introduce a bill that would eliminate milk pricing regulations that dairy producers rely upon as a lifeline when prices drop,” he added. “When this issue was discussed and debated years ago, a CDFA study concluded that deregulation as called for in AB 2730 would shift virtually all risk to producers and it is just shameful that years later she is attempting to gut our minimum pricing laws in such an underhanded way.” 
   AB 2730 would eliminate minimum pricing and pooling regulations on the largest Class of milk, Class 4 totaling approximately 80 percent of all milk produced in the state. California is the top milk producing state in the nation and such dramatic regulatory changes would impact dairy farmers across the state and nation. In Wisconsin, the state with the second highest milk production, milk pricing regulations are in effect and dairy farmers are paid significantly higher prices. Years ago federal order hearings concluded that deregulation as called for in AB 2730 is inequitable to dairy producers and processors. 
   “Dairy farmers in the federal order system have the opportunity to vote when substantive changes are made to dairy farmer pricing regulations and Secretary Ross is denying California dairy farmers that fundamental right,” explained CDC Executive Director Lynne McBride. More than 400 dairies have gone out of business in the last five years and fewer than 1500 dairies remain in California. A significant reason for the drop in the number of dairies is due to the fact that California dairy farmer prices rank lowest in the nation and AB 2730 would drive the price paid to dairy farmers even lower.   
   “The Secretary is claiming there is consensus in support of AB 2730 and yet that could not be further from the truth. Dairy farmers across the state strongly object to the radical changes in dairy pricing regulations called for in AB 2730,” concluded McBride.
   California Dairy Campaign (CDC) is a grassroots organization of dairy farmers who are working to encourage lawmakers and the dairy industry to be more responsive to the needs of the family dairy farm in California. CDC is a member organization of California Farmers Union (CFU). Comprised of more than 1300 farmer, and rancher members, California Famers Union advocates policies to lawmakers at the state and national levels on behalf of its membership throughout California. CFU is a state chapter of National Farmers Union (NFU), which represents more than 250,000 members nationwide.

Mielke Market Daily (A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update Associate Editor Lee Mielke)
   Cash dairy traders are still sorting out last week’s July Milk Production report and July  Cold Storage data (see related article above) but they inched the 40lb. block Cheddar price up another 0.25¢, to $2.2650/lb. Three cars traded hands at $2.26/lb. but an unfilled bid took it to today’s higher close and perhaps firmed the spread. The 500lb. Cheddar barrels were unchanged, holding at $2.26/lb., with no activity.
   Class III futures moved higher today: Sept. +22¢, Oct. +31¢, Nov. +19¢, & Dec. +16¢. Eyes have been on the September contract in particular, which settled today at $23.75. Some wonder if it will top April’s record high Class III price of $24.31/cwt.
   Cash butter, after losing 2.5¢ last Monday, only to reverse direction and race to a new record high $2.8225/lb. on Friday, reversed gears again this morning, gave back 4.25¢, and slipped to $2.78/lb. Ten carloads found new homes, with the first three at Friday’s $2.8225/lb., but the price kept slipping from there, with the final sale at $2.78/lb. An offer at that price was left on the board.
   Even with today’s dip, there is concern how much of a magnet this price will be to butter imports.
   And, after 15 sessions and 35¢ worth of decline, cash Grade A nonfat dry milk was unchanged today, holding at $1.30/lb. A bid at $1.25/lb. went unfilled. The last time we saw powder this low was July 19, 2012.

Today’s Market Closing Prices 
Butter: Down 4.25¢, to $2.78/lb.
Cheddar blocks: Up 0.25¢, to $2.2650/lb.   
Cheddar barrels: Unchanged, at $2.26/lb.  
Grade A nonfat dry milk: Unchanged, at $1.30/lb.  
Class III milk (prelim.): Aug. $22.21/cwt., -2¢; Sept. $23.75, +22¢, Oct. $22.75, +31¢; Nov. $20.81, +19¢; & Dec. $19.67, +16¢. Based on today’s CME settlements, the Fourth Quarter 2014 average now stands at $21.08, +22¢ from Friday. The First Quarter 2015 average is now at $18.30, +8¢ from Friday. The Second Quarter 2015 average today stands at $18.06, +10¢ from Friday.

Looking ahead:
   It’s a lean week for USDA reports following today’s Crop Progress report. The weekly National Dairy Products Sales Report (NDPSR) is issued Wednesday afternoon, and the monthly Ag Prices report is out Thursday, which will include the latest milk feed price ratio.

Tuesday on DairyLine:
   DairyBusiness Update’s Lee Mielke talks with California Dairy Campaign Executive Director, Lynne McBride, about
         their opposition to a new milk pricing plan.
   John Ellsworth from Success Strategies.