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DairyBusiness Update: May 13, 2014


DairyBusiness Update: Tuesday May 13, 2014      

Dairy Industry Eyes Are on Processed Cheese
That’s according to Ross Christieson, Senior vice president, market research and analysis at the U.S. Dairy Export Council (USDEC).  In a posting on the USDEC website, Christieson writes: Outside of Europe and the United States, processed cheese is the most-consumed cheese type in the world. The product’s ability to survive ambient distribution made it the gateway to cheese consumption in emerging markets, where incomplete cold chains, among other factors, hindered natural cheese options.
   Over the years, with demand steadily rising, manufacturers built capacity closer to the point of consumption—in Morocco, Japan, Egypt and elsewhere. That trend to localize manufacturing continues today and has translated into rising imports of natural cheese for processing and significant opportunity for U.S. suppliers.
   A recent processed cheese research report by the checkoff-funded U.S. Dairy Export Council (USDEC) focused on 10 key markets for processed cheese: five in Asia (China, Indonesia, Japan, the Philippines and South Korea) and five in the Middle East/North Africa (Algeria, Bahrain, Egypt, Morocco and Saudi Arabia).
   These 10 nations manufactured more than 1.2 billion lbs. of processed cheese in 2013. They utilize small volumes of gouda, mozzarella, cream cheese and other varieties, but cheddar dominates the kettle. Last year, they imported about 344 million lbs. of cheddar from the top four suppliers— Australia, the European Union, New Zealand and the United States.
   Domestic demand in these markets continues to grow, and some of the nations, particularly those in the Middle East/North Africa, are becoming regional manufacturing hubs, exporting processed cheese to dozens of neighboring countries. USDEC projects that aggregate processed cheese production in the 10 nations will rise to more than 1.7 billion lbs. by 2017 pushing total annual cheddar import requirements to more than 450 million lbs.
   New Zealand traditionally dominates raw material supply, but the United States has steadily raised its profile. We have moved into a strong No. 2 position, as our share of cheddar exports to the 10 nations jumped from 8 percent in 2008 to 26 percent in 2013.
With demand rising and market leader New Zealand signaling that cheddar for processing has taken a back seat to milk powder and other products, we now have a golden opportunity to take over the No. 1 position—if we decide to go after it.
   To become the dominant supplier of cheddar for processing, we need to revise how we approach the market. The study outlined four strategies.
   Read more at www.usdec.org.

Whey Product Demand is Robust
   World demand for high-protein whey products continues to be robust, according to Minnesota-based Milk Specialties Global, but the shift in world markets as high prices trickle down to end users and consumers could accelerate into the summer. Some changes could simply be opportunistic. Some could be permanent as manufacturers look to milk protein concentrates (MPC) in their existing and new formulations.
   U.S. whey exports have benefited from strong global demand for proteins and constrained supplies this year. As a result, U.S. whey protein exports were much higher in March 2014 than they were a year earlier, according to the most recent trade data released this month by USDA’s Foreign Agricultural Service. Whey protein concentrate (WPC) and whey protein isolate (WPI) exports with more than 80% protein rose 55% to 5.1 million pounds in March. Similarly, March exports of WPC with less than 80% protein were 24.5 million pounds, 28% more than the prior year. WPC 34 represents a large portion of lower-protein WPC export activity, and WPC 34 exports were extraordinarily robust as manufacturers looked for substitutes to higher-cost nonfat dry milk (NDM) and skim milk powders (SMP). However, in recent weeks world market prices for NDM/SMP have been tumbling and that could encourage manufactures to switch away from WPC 34.
   As competition for whey proteins increases, some companies are looking to MPC to fill the growing void. During 2012, nearly 40% of recent product launches that included MPC (40-70% protein) as an ingredient were in the yogurt category. For products using higher-protein MPC/milk protein isolate (MPI) with 85% or higher protein, meal replacement and beverages accounted for 50% of new product launches followed by sports nutrition offerings at 25%.
   Read more at http://www.milkspecialties.com/news/may-dairy-market-report.

CWT Accepts 11 Export Assistance Requests
   Cooperatives Working Together (CWT) has accepted 11 requests for export assistance from Dairy Farmers of America, Foremost Farms, Michigan Milk Producers Association, Northwest Dairy Association (Darigold), and Tillamook County Creamery Association to sell 1.166 million pounds of Cheddar cheese, 551,156 pounds of 82% butter and 1.047 million pounds of whole milk powder to customers in Asia, Africa, Central America, the Middle East, and South America.
   The product will be delivered through November and raises CWT’s 2014 cheese exports to 51.535 million pounds, plus 42.647 million pounds of butter and 8.856 million pounds of whole milk powder to 35 countries on six continents. These sales are the equivalent of 1.492 billion pounds of milk on a milkfat basis.

Another View on Corn  
   Dr. Darrel Good of the Department of Agricultural and Consumer Economic at the University of Illinois, writes in his Farmdoc posting: The USDA's WASDE report released on May 9 contained updated projections for consumption of U.S. corn during the current marketing year and updated production and consumption projections for the 2014-15 marketing year. The favorite sport of market analysts is to second guess those projections.
   For the current marketing year, the projection of feed and residual use of corn was unchanged from the April projection of 5.3 billion bushels since no new information will be available on the rate of consumption until the USDA releases the estimate of June 1 corn stocks on June 30. The projection of the amount of corn used for ethanol production was increased by 50 million bushels, to a total of 5.05 billion bushels. That projection is consistent with the magnitude of ethanol production from September 2013 through April 2014 and the current weekly pace of production and came as no surprise.     
   The projection of exports was increased by 150 million bushels, to a total of 1.9 billion bushels. While an increase was expected, the magnitude of the increase exceeded expectations and raised concerns that the projection may now be too high. Exports and export sales have been robust over the past three months, but the magnitude of unshipped sales is large. 
   Some apparently view the sheer size of those sales as increasing the risk of larger than normal cancellations or rolling of sales into next year. Unshipped sales as of May 1 were reported at 587 million bushels, but cancellations of 9.5 million bushels were reported on May 6. Unshipped sales on May 1 in recent years when exports were near the projected level for this year were 465 million in 2010, 446 million in 2009, and 396 million bushels in 2008.  All else equal, having large sales seems preferable to having small sales.
   The primary concern about further cancellations centers on sales to China since they have cancelled several purchases already this year. As of May 1, unshipped sales to China totaled only 23 million bushels.  However, unshipped sales to unknown destinations that might include some sales to China totaled 162 million bushels.    
    Unshipped sales stood at 124 million bushels for Japan, 45 million to South Korea, and 111 million bushels to Mexico. Those sale are likely less vulnerable to cancellation, but some could be rolled into next year.
   As of May 8, the USDA reported cumulative marketing year export inspections at 1.198 billion bushels. However, from September 2013 through March 2014, cumulative export estimates from the Census Bureau exceeded cumulative inspections by 37 million bushels.  If that margin persists, exports during the final 16. 4 weeks of the year will need to average 40.5 million bushels per week to reach the USDA projection of 1.9 billion bushels.
   Inspections for the eight weeks ended May 8 averaged 51.7 million bushels per week. Net new export sales need to average about eight million bushels per week to reach 1.9 billion bushels by the end of August. Sales, however, will likely have to exceed 1.9 billion bushels in order for exports to reach 1.9 billion since some sales are typically carried over to the next marketing year. The USDA export projection is attainable, but uncertainty will persist into the late summer.
   Based on current USDA projections of consumption, 2013-14 marketing year ending stocks are projected at 1.146 billion bushels, 185 million bushels less than last month's projection and 741 million less than the November 2013 projection. Actual year ending stocks will be estimated with the USDA's release of the September 1 stocks estimate on September 30. 
   Even if the current USDA projection of exports is correct, year-ending stocks could differ from both the current and subsequent projections since the magnitude of feed and residual use will remain partially unknown until the release of the September stocks estimate. That stocks estimate in the previous 10 years, for example, has differed from the WASDE September forecast of ending stocks by as little as four million bushels (2004) and as much as 320 million bushels (2010).
   For 2014, the USDA projected yield based on a weather-adjusted trend model that assumes normal mid-May planting progress and normal summer weather is a record 165.3 bushels per acre. Based on corn planting intentions revealed in the March Prospective Plantings report, the 2014 crop is projected to be 10 million bushels larger than the record crop of 13.925 billion bushels produced in 2013.  Exports during the 2014-15 marketing year are expected to be 200 million bushels less than the projection for the current year, while feed and residual use is expected to drop by 50 million bushels. 
   These production and consumption projections point to stocks at the end of the 2014-15 marketing year of 1.726 billion bushels, generally exceeding expectations.  The marketing year average price is projected in a range of $3.85 to $4.55 per bushel, down from $4.50 to $4.80 expected this year.   
   Although other factors may have contributed, corn prices declined following the release of the new projections. Given the surprisingly large level of consumption of U.S corn that has unfolded this year and planting season weather that may pose a threat to both planted acreage and yield in some areas, the price weakness appears to be premature.
   Read more at http://farmdoc.illinois.edu/2014/05/second-guessing-usda-projections-for-corn.html.

Mielke Market Daily 
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update associate editor Lee Mielke)
   The cheese bleeding began again today. The blocks gave up 4.75¢ on a single trade, and fell below $2/lb. for the first time since December 19, 2013, to $1.9975/lb. The barrels were down 6¢, on a trade, to $1.96/lb. They haven’t been below $2 since January 6 of this year.
   FC Stone market analyst, Ryan Cox wrote in this morning’s Insider Opening Bell: "The fundamentals haven't changed. Cheese exports are strong, and the flush has been delayed in the Midwest."
   Front month Class III milk futures didn’t like it. May was down 9¢, June down 41¢, and July, down 17¢.
   Butter, on the other hand, resumed its climb, inching up 0.75¢, to $2.1750/lb., highest level since May 27, 2011. Two cars traded hands, 1 at $2.1650/lb. and the 2nd at $2.1750/lb. A wishful offer at $2.20/lb. was again left on the board.
   Cox warns that "U.S. butter is now higher than world butter prices, so U.S. prices should run into resistance at some point."
 A sale took the cash powder up to $1.79/lb. but the following 2 sales were at yesterday’s close of $1.78/lb. Two offers at that price got no response.

Today’s Market Closing Prices
Butter: Up 0.75¢, to $2.1750/lb.
Cheddar blocks:  Down 4.75¢, to $1.9975/lb.
Cheddar barrels: Down 6¢, to $1.96/lb.
Grade A nonfat dry milk: Unchanged, at $1.78/lb.
Class III milk: May $22.65, -9¢; Jun. $20.70, -41¢; Jly $20.17, -17¢; Aug. $20.05, +3¢; & Sept. $20.04, +4¢. Based on today’s CME settlements, the Third Quarter 2014 average now stands at $20.09, -3¢ from Monday. The 2nd half average is now at $19.63, -1¢ from Monday.

Looking ahead:
   The weekly National Dairy Products Sales Report (NDPSR) is issued tomorrow, which reports the dairy product prices that USDA uses to calculate Federal order milk prices, and the monthly Livestock, Dairy, and Poultry Outlook is out Thursday.    
Wednesday on DairyLine:
   Former Ag Secretary Dan Glickman on how modern agriculture can adapt to the world consumer.
USDA meteorologist Brad Rippey reports on the uptick in corn planting last week.