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DairyBusiness Update: July 28, 2014


Cheese Output Not Taking Off / Domestic Demand Good
Cheese production was mixed last week, with steady to higher production in the East, but steady to lower production in the West and Midwest, reports USDA’s Dairy Market News. Cheese manufacturers are often looking for additional milk or are fortifying cheese vats with nonfat dry milk or condensed skim to increase yields. Some Midwest producers are having increasing issues finding surplus milk. Domestic demand is good and some manufacturers are warning about possible delays in orders for August. Export demand has slowed in the West and stocks are increasing for domestic orders. As schools begin to prepare for the upcoming year, new orders are being placed for increased mozzarella needs.

Butter Production Dropping
   Butter production is generally declining as milk production and components are seasonally lower, according to Dairy Market News. Cream supplies are mostly priced above profitable production margins causing many churn operators to sell cream spot loads for better returns. Several butter manufacturers are microfixing sought-after bulk butter to fill print orders. (Microfixing is basically thawing 69lb. frozen and cutting it into 1lb or quarter-pound blocks) Butter sales into retail and food service are mostly steady. High butter prices and production input costs are restricting stock building for Fourth Quarter needs.

Milk Production Flush Has Come and Gone
   Milk handlers in most areas of the country report milk loads are generally losing volumes, reports Dairy Market News. There are a few pockets within the Southeast and California where milk producers noticed slight upticks in production related to milder weather. Manufacturing milk supplies are finding processing room throughout the country, with some sales of milk accommodating the needs to run a few plants more efficiently.
   Fluid milk orders are light. Bottlers indicate discussions with educational institutions are ongoing as the start of the school year approaches. Condensed skim and cream sales declined into ice cream/mix/frozen novelties accounts as those manufacturers reassess inventories and projected sales through the balance of the year. Cream loads are more available this week compared to last week as some butter manufacturers weigh current butterfat pricing, production, and storage costs.

Corn Crop 53% in Good Condition 
   There’s wasn’t a lot of change again in the Agriculture Department’s latest Crop Progress report, issued this afternoon which shows that 22% of the nation’s corn is rated in excellent condition, as of the week ending July 27. That’s unchanged from the previous week and compares to17% a year ago. Fifty three percent is rated good, down 1% from the previous week, but compares to 46% a year ago. The 18 states which comprised 91% of the 2013 crop and their current rating are listed below:

State                               Week Ending  July 27, 2014
                Very poor           Poor          Fair          Good       Excellent  
Colorado      2%                   5%          25%          50%        18%
Illinois           1%                   3%          14%          52%        30%
Indiana         1%                   4%          20%          52%        23%
Iowa             1%                   5%          16%          52%        26%
Kansas         3%                   7%          31%          44%        15%
Kentucky      3%                   9%          22%          49%        17%
Michigan      1%                    4%         15%          61%        19%
Minnesota    2%                    5%         25%          54%        14%
Missouri        -                       2%         14%          51%        33%
Nebraska     2%                    5%         19%          52%        22%
N Carolina    3%                  11%        24%           50%       12%
N Dakota      1%                    4%        17%           54%       24%
Ohio             1%                    4%        19%           55%       21%
Penn.            -                       4%        16%           45%       35%
S Dakota      2%                    5%        19%           60%       14%
Tennessee   1%                    4%        19%           54%       22%
Texas           1%                    5%        33%           46%       15%
Wisconsin    2%                    7%        19%           48%       24%

   The report shows 78% of the corn is silking, up from 56% the previous week and 67% a year ago, and 3% ahead of the five year average.
   Seventy six percent of the soybean crop was blooming, as of the week ending July 27, up from 60% the previous week, up from 62% a year ago, and 4% ahead of the five year average. The report shows 16% of the soybean crop is rated as excellent, with 55% rated as good, and 23% as fair. Thirty eight percent of the soybeans are setting pods, up from 19% the previous week, up from 18% a year ago, and 7% ahead of the five year average.
   There is 87% of the cotton crop squaring, up from 85% the previous week, dead even with a year ago, but 2% behind the five-year average. The report shows 49% of the cotton is setting bolls, up from 38% the previous week and 37% a year ago, but 2% behind the five year average. The report indicates that 12% of the cotton crop is rated in excellent condition, 42% as good, and 33% as fair.

2014 Corn Storage….Who Pays?
   The majority of annually produced crops such as corn obviously have to be stored. For corn producers, the question at harvest time will be who will store the portion of the crop which has not yet been sold? Dr. Darrel Good, of the Department of Agricultural and Consumer Economics at the University of Illinois, addresses the question in his latest FarmDoc Daily posting. He writes:
   That portion of the crop which has not been sold can be sold at harvest for someone else to store, or the producer can store the crop either on the farm or in commercial facilities.  For the portion of the crop stored by the producer, the second question is whether the stored crop should be priced for later delivery or held unpriced. That decision is influenced by the magnitude of the carry in the corn market, the cost of storage, and expectations about the change in corn prices after harvest. For corn that is stored and priced for later delivery, the price for later delivery obviously needs to exceed the cost of storage. 
   For forward cash sales, the differences between the forward bids for alternative delivery dates and the spot bid can be compared to the cost of storage to determine the returns to storage. The cost of storage includes interest on the value of the stored crop and the magnitude of out-of-pocket costs to store the crop. Those costs will likely be higher for off-farm storage than for on-farm storage since overhead costs of existing on-farm facilities would not be an out-of-pocket cost. 
   Spot and forward bids in the cash market reflect current futures prices, the spot basis, the magnitude of the carry in the futures market, and the basis for later delivery. Actual basis in the later delivery periods may differ from the basis reflected in the current forward bid. 
   A producer who thinks the basis will be stronger than currently offered could also calculate the likely return to storage from hedging and then selling the crop at a stronger basis level.
   Basis levels and basis patterns vary considerably by location so that an example of the likely returns to storage that is representative of all locations is not possible.  Harvest basis differences are especially large this year as cash bids reflect a tremendous variation in storage capacity, expected crop size, and transportation issues. 
   In central Illinois, average harvest bids on July 25th were $0.31 under December futures. With a July-December spread of nearly $0.27, the average harvest bid was $0.58 under July 2015 futures. If that basis is near $-0.10 in mid-June 2015, as it was this year, then the market is offering about $0.48 return for corn that is hedged and stored from harvest to mid-June. With interest costs of about $0.11 ($3.40 @ 5 percent for 7.5 months), the return to storage would be positive with storage costs less than $0.37. With out-of-pocket on-farm storage costs likely to be considerably less than $0.37 for most producers, there is strong incentive to fully utilize that storage capacity.  For corn already hedged in December futures, the market is encouraging the rolling of those hedges to deferred contracts if on-farm storage is available.
   The corn market is currently encouraging storage of the 2014 corn crop and that decision could be made now with forward sales or by hedging in the futures market.  With expectations of a very large crop, however, the opportunity to capture a return to storage is not expected to disappear as the market will likely continue to offer positive returns to storage into harvest time. The question, then, is whether additional quantities of the crop should be sold at current price levels.
   Corn prices between now and harvest will be determined mostly by the expected size of the crop. Based on market commentary and price behavior, the market appears to be expecting an average corn yield above 170 bushels, with a lot of forecasts pushing into the mid-170s. Those expectations appear justified based on crop condition ratings, but the growing season still has a ways to go. Unusually cool temperatures in July have favored crop development during the pollination period and are characteristic of previous years with very high corn yields. On the other hand, average July precipitation will likely end up well below average, which is not characteristic of previous very high yielding years (farmdoc daily, July 9, 2014). If dry conditions persist in August, the U.S. average yield will likely still be very high, but perhaps fall short of some of the current lofty projections. If so, prices would increase modestly going into harvest.
   After harvest, corn prices will be influenced by the strength of demand and the pace of consumption. Corn consumption should be supported by a combination of strong domestic demand and the lowest prices in more than four years. If that is the case, corn prices would be expected to move modestly higher after harvest in a typical large-crop pattern. While there is still risk of lower prices, a little patience in pricing additional quantities of the 2014 corn crop appears warranted.

Russia Bans Ukranian Dairy Imports 
   Reuters reports that Russia has banned all dairy supplies from Ukraine, with Russia's Veterinary and Phytosanitary Surveillance Service (VPSS) citing a lack of quality control, in the latest sign of worsening trade relations between the two countries.
Ukraine signed a free-trade pact with the European Union in June and Russia, which has previously wielded import bans as punishment for countries attempting to move out of Moscow's orbit, said it was likely to respond with trade barriers.   The ban, which comes into effect on July 28, is a result of phytosanitary violations and the falsification of quality controls, said VPSS spokesman Alexei Alekseenko.
   Dairy products account for only a small fraction of Ukraine's sales to Russia, but all Ukrainian exporters will be anxiously eyeing the Kremlin's trade stance because Russia accounts for nearly a quarter of Ukrainian external trade, contributing about 8 percent of gross domestic product.
   Read more at http://uk.reuters.com/article/2014/07/25/uk-ukraine-crisis-trade-idUKKBN0FU0UT20140725.

Still Awaiting Details on Dairy’s New Margin Protection Program
   California’s Milk Producers Council’s By RobVandenheuvel reports in his Friday newsletter that he has received  calls and emails from our members regarding the Farm Bill’s new Margin Protection Program that is going to be rolled out later this year. The U.S. Department of Agriculture (USDA) has indicated that producers will be able to sign up for the new program this fall, which Vandenheuvel says has rightly triggered a desire by dairymen to learn more about their options.
   A couple months ago, MPC began delving into the details of the program in this newsletter, but unfortunately, we are still waiting to hear final details, as Congress left several critical details up to the discretion of USDA in implementing the program. In case you missed any of those previous articles, you can find them here:
• Part One – An introduction: http://www.milkproducerscouncil.org/updates/032814.pdf
• Part Two – Decisions: http://www.milkproducerscouncil.org/updates/041114.pdf
• Release of online calculator: http://www.milkproducerscouncil.org/updates/050914.pdf
   Once we have final details from USDA, MPC will be conducting membership meetings throughout the State to provide details on the program, what options are available, how producers can sign up, and how you can evaluate the best option for your dairy. So stay tuned, as we expect those details to be coming from USDA in the near future.

Idaho Dairy Producers Working to Better Equity Position
   While margins continue to be favorable for dairy producers, many are working on being on a better equity position. That includes dairy producers in Idaho where margins remain strong compared to where they have been, according to Bob Naerebout, executive director of the Idaho Dairymen’s Association speaking on DairyLine Radio.
   “A lot of dairymen have taken on the position of paying down debt and getting in a better equity position, that’s where they want to be,” he said. “The Idaho dairy industry is like most states, and doing quite well.”
   Despite better margins, producers continue to deal with issues both on and off the farm. The Environmental Protection Agency’s (EPA) water proposal has rattled the agriculture industry, and Idaho producers are watching the issue closely.
   “The EPA has obviously opened up a hornet’s nest if you’re reading or listening to anything that’s going on with waters of the U.S.,” he said.  The good news is there is a lot of national legislative support for agriculture. He says it’s important for producers and other agriculture industry professionals to be involved in the ongoing comment period.
   Earlier this month, several agriculture groups led by the National Milk Producers Federation asked EPA to withdraw its “interpretive rule concerning Clean Water Act permit exemptions for certain farming activities near wetlands. EPA and the Army Corps of Engineers released the rule earlier this year at the same time as their proposal to define “Waters of the U.S.” Comments on the definition can be submitted until Oct. 20, 2014.

Study Identifies Midwest Opportunities to Fill Dairy Demand Growth
   The Midwest Dairy Association has released a report regarding the potential of the Midwest to capture its share of growing domestic and global dairy demand opportunities. Titled “A Path Forward,” it points out the region’s land and water infrastructure, positive business climate, capital resource availability and favorable returns as key ingredients that could help determine its place in projected U.S. dairy market growth of 15 percent by 2022.
   Minnesota Milk leadership participated in a presentation on the study’s findings and the organization is eager to collaborate on aspects of the report which present an opportunity to increase public support of dairy farms to thrive and grow and expand dairy development in Minnesota.
   A copy of the entire “A Path Forward” report as well as the press release is available at the Midwest Dairy "In The News" webpage.

Mielke Market Daily
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update Associate Editor Lee Mielke)
   The Cheddar blocks reversed two sessions of decline this morning and inched up 0.25¢, to $1.9725/lb. Three carloads traded hands, the first two at Friday’s $1.97/lb. and the last at $1.9725/lb. Two bids at $1.97/lb. went unfilled and an offer at $1.98/lb. was left on the board. The Cheddar barrels gave up another 0.5¢, following losses last week of 4.5¢ on Friday, 3.5¢ on Thursday, and 3.75¢ on Wednesday, and are now trading at $1.94755/lb. Five cars exchanged hands today, the first two at $1.95/lb., and the price kept sliding from there. A bid at $1.9450/lb. went unfilled and an offer at $1.9575/lb. was left uncovered.    

   Class III futures prices reversed gears, with August up 15¢, Sept. +35¢, Oct. +29¢, Nov. +17¢, and Dec. +13¢. Derek Nelson, analyst at FCStone in Chicago, wrote in this afternoon’s Insider Closing Bell that "Another round of higher temperatures in the West are providing some support as milk production is thought to be impacted."   
   Cash butter lost another 2¢ this morning, following Friday’s 3¢ decline. Seven cars found new homes today, the first four at $2.5550/lb., but the price reversed and inched back up to today’s close of $2.57/lb. 
  Cash Grade A nonfat dry milk remained unchanged for the fifth consecutive session at $1.6750/lb. Again, there was no activity today.

Today’s Market Closing Prices 
Butter: Down 2¢, to $2.57/lb.
Cheddar blocks: Up 0.25¢, to $1.9725/lb.   
Cheddar barrels: Down 0.5¢, to $1.9475/lb.
Grade A nonfat dry milk: Unchanged, at $1.6750/lb.  
Class III milk (prelim.): July $21.53/cwt., Unchanged; Aug. $21.60, +15¢; Sept. $21.07, +35¢, Oct. $20.19, +29¢; Nov. $19.52, +17¢; & Dec. $19.23, +13¢. Based on today’s CME settlements, the Third Quarter 2014 average now stands at $21.40, +17¢ from Friday. The Fourth Quarter average is now at $19.65, +20¢ from Friday. The First Quarter 2015 average is now at $18.21, +6¢ from Friday. The Second Quarter 2015 average today stands at $17.97/cwt.

Looking ahead:
   The next Global Dairy Trade Auction is Tuesday, August 5, and this month’s Ag Prices report is out Thursday, not today as stated in Friday’s report. The weekly National Dairy Products Sales Report (NDPSR) is issued by USDA Wednesday afternoon. The Agriculture Department also announces July Federal Order Class II, III, and IV milk prices Wednesday afternoon. California’s comparable July Class 4a and 4b prices are scheduled to be announced by the California Department of Food and Agriculture on Friday. USDA also issues its monthly Dairy Products report Friday afternoon.

Tuesday on DairyLine:
   The cattle herd is still shrinking but more heifers were retained - USDA livestock analyst Shayle Shagam explains.
   Our youth spotlight features students from both coasts...Sierra Knight from Lisbon, NY and Callie Brodt, from
        Ferndale, California