DairyBusiness Update for Feb. 1, 2013

California adjustments don't stop price decline

California’s Class 4a/4b milk prices were announced on Feb. 1:

• Class 4a: $17.08/wt., down 39¢ from December, but 90¢ more than January 2012. The 2012 average was $15.63/cwt.

• Class 4b: $15.84/cwt., down 46¢ from December 2012, but $1.61 more than January 2012. The 2012 average was $15.54/cwt.

 The  prices for the months of February-May 2013 include the temporary price increases resulting from the Dec. 21, 2012 public hearing. In order to calculate the class prices for these months, the additional temporary increases are added to the corresponding per pound price of the Fat and solids not fat after all other calculations of the current formulas have been performed. 

January 2013 federal order prices lower

January 2013’s federal order class prices for manufacturing classes of milk were announced on Jan 30. They are down from December, but above a year ago.

• Class II: $18.19/wt., down 11¢ from December, but 43¢ more than January 2012. The 2012 average was $16.64/cwt.

• Class III: $18.14/cwt., down 52¢ from December 2012, but $1.09 more than January 2012. The 2012 average was $17.44/cwt.

• Class IV: $17.63/cwt., down 20¢ from December 2012, but $1.07 more than a year ago. The 2012 average was $16.01/cwt.

Dairy Forward Pricing Program extended

USDA issued a notice extending the Dairy Forward Pricing Program to allow producers and cooperative associations to enter into forward price contracts under the program through Sept. 30, 2013, effective on Feb. 1. Producer milk that has been forward contracted under the terms of the program is not subject to federal order minimum pricing provisions.

The program allows producers and producer co-op associations to voluntarily enter into forward price contracts with milk handlers. The 2008 Farm Bill initially prohibited new forward contracts  after Sept. 30, 2012, and allowed no forward contracts to extend beyond Sept. 30, 2015.

However, the passage of the American Taxpayer Relief Act of 2012 revised the program to allow new contracts to be entered into until Sept. 30, 2013. Any forward contracts entered into until the deadline on Sept. 30, 2013, are still subject to the 2015 cutoff date.

All new contracts must be signed by both parties prior to the effective month, and received by the federal order market administrator prior to the 15th of the applicable month. For example, to contract March 2013 milk, the forward contract and disclosure must be signed prior to March 1 and received by the market administrator by March 15.

For more information, contact: Roger Cryan, Director, Economics Division, USDA/AMS/Dairy Programs, roger.cryan@ams.usda.gov.

Dairy margins weaken

Dairy margins deteriorated over the past two weeks, primarily in nearby marketing periods where milk prices have been under pressure, according to the latest CIH Margin Watch from Commodity & Ingredient Hedging, LLC. 

Class III milk futures have dropped between $1-$2/cwt. in the February-May 2013 contracts, with smaller losses evident in summer contracts, as well. USDA lowered their 2013 all-milk price forecast to a range of $18.85-$19.65/cwt., down 30¢ from December, due to strong production expected in the new year amidst questionable demand for cheese and butter. 

Product exports have lagged recently as U.S. prices were uncompetitive in the global market, although expectations of increased culling due to poor spot margins and high beef prices may help to bring down milk production over time. This may be one reason why losses in deferred milk futures have been less pronounced in summer and fall contracts.

Moreover, due to last year’s widespread drought, 2012 hay production was a record low 119.9 million tons, 8.6% lower than 2011’s crop. Lack of good quality hay availability later in the crop year may also negatively impact milk production moving forward. Feed costs have also been creeping higher as record cash basis levels and weather concerns in Argentina have put upward pressure on both corn and soybean meal during January. 

Despite these challenges, deferred margins in the second half of 2013 remain historically strong at the 80th percentile of the past 10 years. Visit www.cihmarginwatch.com.

EPA boosts proposed 2013 Renewable Fuel Standards

The U.S. Environmental Protection Agency (EPA) is proposing the 2013 percentage standards for four fuel categories that are part of the agency’s Renewable Fuel Standard program (RFS2). The proposal, announced Feb. 1, will be open for a 45-day public comment period. 

The Energy Independence and Security Act of 2007 (EISA) established the RFS2 program and the annual renewable fuel volume targets, which steadily increase to an overall level of 36 billion gallons in 2022. To achieve these volumes, EPA calculates a percentage-based standard for the following year. Based on the standard, each refiner and importer determines the minimum volume of renewable fuel that it must ensure is used in its transportation fuel.The proposed 2013 overall volumes and standards are: 

• Biomass-based diesel (1.28 billion gallons; 1.12%). Volume in 2012 RFS was 1.0 billion gallons.

• Advanced biofuels (2.75 billion gallons; 1.60%). Volume in 2012 RFS was 2.0 billion gallons.

• Cellulosic biofuels (14 million gallons; 0.008%). Volume in 2012 RFS was 8.65 billion gallons.

• Total renewable fuels (16.55 billion gallons; 9.63%). Volume in 2012 RFS was 15.2 billion gallons.

Overall, EPA’s RFS2 program encourages greater use of renewable fuels, including advanced biofuels. For 2013, the program is proposing to implement EISA’s requirement to blend more than 1.35 billion gallons of renewable fuels over the amount mandated for 2012.

More information on the standards and regulations: http://www.epa.gov/otaq/fuels/renewablefuels/regulations.htm