DairyBusiness Update: July 14, 2014

PreGDT View
  
HighGround Dairy’s Eric Meyer writes that “More volume continues to be removed from upcoming GDT trading events and the 12 month forecast as lower prices prompt Fonterra to change their anticipated product mix to better their stream returns. A story surfaced shortly after the last GDT auction that New Zealand’s ANZ Bank was lowering their Fonterra 2014/15 forecast payout by nearly 11% to $6.25 kg/MS, citing lower dairy commodity prices and the NZ Dollar trading at three year highs. NZX futures have not disappointed with the Sep-Dec WMP futures average sliding 12.4% ($455MT) since the last GDT auction.
   However, with WMP prices running up against a multi-year support level, recent chatter that fat-filled milk powder is trading at a premium to today’s WMP price and the less-than-expected monsoon rains in India may prompt buyers to stand in and provide support to tomorrow’s auction.
   To get Meyer’s complete analysis, write him at: dairy@highgroundtrading.com.

Cheese Output Depending on Milk Availability
   Milk availability last week and thus cheese production, varied, according to USDA’s Dairy Market News. Western cheese production is active, with steady milk supplies, except in the Southwest where milk availability is variable. Midwest production is steady to slightly lower, due to tighter milk supplies. Northeast production is steady to higher.

Ice Cream Demand Preventing Butter Stock Build
   Demand from ice cream and cream cheese accounts for cream supplies continues to restrict butter churn activity, according to Dairy Market News. Some butter manufacturers are supplementing production rates by microfixing additional volumes of bulk supplies to fill immediate needs. Domestic buyer interest is active. International demand is light. Inventories are steady to generally lower.

Warning on World Milk Supply
   Jerry Dryer’s Dairy and Food Market Analyst reports that global milk production will overwhelm demand for the next five years, according to a recent analysis by Goldman Sachs. Global production will exceed demand by 2 billion liters thru 2018, according to Bloomberg’s summary of the GS report.
   Rabobank’s latest analysis doesn’t look out five years, but it certainly sees the near-term much differently than Goldman Sachs. We side with the Rabobank camp.
   The summary of the most recent Rabobank Dairy Quarterly sums up the global dairy market like this: “By early 2015, we expect to see prices enter a recovery phase on the back of slower export supply growth, as economic growth boosts consumption in export and import regions and China returns to the world market in earnest.”
   While USA prices have proven more resilient, world prices have moved steadily lower over the past several months. Case in point, Oceania and Western European whole milk powder prices climbed steadily and sharply higher during 2013. Entering 2014, the whole milk powder price was solidly above US$5,000 per metric ton ($2.33/lb). Today, the price in Europe is below $4,500 and in Oceania, below $3,750, according to USDA’s Dairy Market News fortnightly survey of international prices. Earlier this week, whole milk powder for Sep was trading at $3,075 on the NZX and Jan15 was trading at $3,635.

Corn Crop 54% in Good Condition
   The Agriculture Department’s latest Crop Progress report, issued this afternoon, shows 22% of the nation’s corn, grown in the 18 states which comprised 91% of the 2013 crop, is rated in excellent condition, as of the week ending July 13. That’s up from 21% the previous week and 17% a year ago. Fifty four percent is rated good, unchanged the previous week, and compares to 49% a year ago. The states are listed below:

State                               Week Ending  July 13, 2014
                Very poor           Poor          Fair          Good       Excellent  
Colorado      1%                   4%          25%          52%        18%
Illinois           1%                   3%          15%          53%        28%
Indiana         1%                   4%          20%          52%        23%
Iowa             2%                   5%          17%          52%        24%
Kansas         2%                   6%          30%          49%        13%
Kentucky      1%                   4%          18%          55%        22%
Michigan      1%                   4%          15%          60%        20%
Minnesota    2%                   6%          28%          49%        15%
Missouri        -                      2%          14%          52%        32%
Nebraska     2%                   5%          19%          52%        22%
N Carolina    4%                  12%         27%          46%        11%
N Dakota      1%                   3%          17%          59%        20%
Ohio             1%                   4%           21%          53%        21%
Penn.            1%                  4%           14%         48%         33%
S Dakota      1%                   2%          15%          67%         15%
Tennessee   -                       3%          18%          56%         23%
Texas           -                       4%          30%          47%         19%
Wisconsin    1%                   6%          16%           51%         26%

   The report shows 34% of the corn crop is silking, up from 15% the previous week, 15% a year ago, and 1% ahead of the five year average.
   The report shows 41% of the soybean crop is blooming, as of the week ending July 13, up from 24% the previous week, 24% a year ago, and 4% ahead of the five year average. The data shows 16% of the soybean crop rated as excellent, with 56% rated as good, and 22% as fair.
   There is 70% of the cotton squaring, up from 53% the previous week, up from 66% a year ago, but 4% behind the five-year average. Data shows 24% of the cotton crop is setting bolls, up from 12% the previous week, up from 16% a year ago, but 1% behind the five year average. The report shows 12% of the cotton crop is rated in excellent condition, 41% as good, and 33% as fair.

How Burdensome are Corn Supplies?
   Dr. Darrel Good, of the Department of Agricultural and Consumer Economic at the University of Illinois, addresses the question in his latest FarmDoc posting. He writes that “Corn prices have been declining for almost two years following the peak price generated by the very small U.S. crop in 2012. The recent sharp decline in prices has been associated with increasing prospects for a very large U.S. corn harvest again in 2014 following the record harvest of 2013. A second consecutive large crop would lead to a further build-up in stocks of corn by the end of the 2014-15 marketing year.
   The important question is how burdensome are those stocks likely to be? The magnitude of year ending stocks will be determined by the size of old crop stocks on September 1, 2014, the actual size of the 2014 crop, and the strength of corn demand during the year ahead. The USDA's WASDE report released on July 11 reflects current USDA expectations for the 2014-15 marketing year. 
   Stocks at the beginning of the marketing year are projected at 1.246 billion bushels, production is forecast at 13.86 billion bushels, consumption is forecast at 13.335 billion bushels, and year-ending stocks are projected at 1.801 billion bushels. Projections for all these categories will continue to change over the next several months.
   The largest uncertainty about the magnitude of stocks at the beginning of the 2014-15 marketing year is the level of feed and residual use of corn this summer. To reach the revised USDA projection of 5.175 billion bushels for the year, use during the summer would need to total about 450 million bushels. That is well above the surprisingly low level of use the past two years, in line with use in the summers of 2010 and 2011, and well below the level of use prior to 2010. The projection seems reasonable.
   Exports of corn are on track to meet the USDA projection of 1.9 billion bushels for the year, while ethanol use is running ahead of the projected pace. If weekly ethanol production during the last nine weeks of the marketing year remained at the level of the week ended July 4, corn used for ethanol production for the entire marketing year would exceed the most recent USDA projection by 35 million bushels. Stocks of old crop corn on September 1 may be slightly less than the USDA projection.
   The bigger question is the likely size of the 2014 U.S. corn crop. The USDA projected yield of 165.3 bushels is based on a weather adjusted trend model that assumes normal July growing conditions. The first survey-based yield projection will be released on August 12. The market expects that yield forecast to be much larger. An average yield of 170 bushels would produce a crop of 14.25 billion bushels, about 390 million bushels larger than the USDA projection, if harvested acreage equals the current projection.
   Current conditions point to a crop larger than projected by USDA, but projections of corn consumption also appear a little conservative. Feed and residual use of corn during the year ahead is expected to be only 25 million bushels more than during the current year.  
   A large crop points to a continuation of a large "residual" use of corn and record livestock profit margins could generate at least a modest expansion in livestock production. That expansion would have to be in the pork, poultry, or dairy sectors as the number of feeder cattle will remain limited. In addition, feed use of corn should be supported by the continuation of very high hog slaughter weights and by lower corn prices. Similarly, corn used for ethanol production could exceed the USDA projection of 5.05 billion bushels if ethanol exports continue to be supported by favorable ethanol prices relative to gasoline prices.
   Corn export prospects are more difficult to gauge. The USDA projection for a 200 million bushel year-over-year decline in U.S. exports also appears a little conservative in light of foreign production prospects.  
   Read more at: http://farmdocdaily.illinois.edu/2014/07/how-burdensome-are-corn-supplies.html.

NMPF Endorses Plan Addressing Serious Animal Disease Outbreak
   The National Milk Producers Federation today endorsed a draft plan for allowing the U.S. and Canada to cope with an outbreak of a serious foreign animal contagion, such as foot-and-mouth disease, suggesting the plan is a template for similar plans involving other important dairy export markets.
   The plan, drafted by the Agriculture Department’s Animal and Plant Health Inspection Service, calls for the United States and Canada to recognize each other’s efforts to control an outbreak, while regionalizing how the outbreak is handled, so as to allow continued trade with disease-free areas of the country.
   In comments filed with APHIS Monday, NMPF, the voice of 32,000 dairy farmers in Washington, noted that Canada is the second-largest export market for U.S. dairy products, and that an outbreak of a highly contagious animal disease such as FMD in either country could be catastrophic for the U.S. dairy industry.
   “We applaud the Agriculture Department for working with its Canadian counterparts to prepare for a foreign animal disease outbreak,” said Jamie Jonker, NMPF’s vice president for sustainability & scientific affairs. “We fully support the draft plan and see it as an effective tool for dealing with an outbreak.”
   The plan, officially termed a framework, calls for the two countries to cooperate in establishing quarantine areas that would be the focus of disease eradication efforts in an outbreak. Trade could then resume or continue in areas considered free of disease. 
   “The framework will facilitate continued trade between disease-free areas, while safeguarding animal health in both countries,” said Jonker. “NMPF encourages USDA to use this approach as a template for other countries that are important U.S. dairy export markets.” These countries include Mexico, China, Philippines, Indonesia, South Korea and Japan.
   This is in contrast to another USDA proposal earlier this year, which NMPF determined had significant flaws, because it will allow imports of fresh beef from certain parts of Brazil which have a history of foot and mouth disease. 
   “We are happy to have Brazil export its enthusiasm for soccer,” said Jonker, “but the last thing we need is for that country to send us its FMD problems.”
   Over the last decade, U.S. dairy exports have increased more than 20 percent annually and the United States is now a global leader in exports for products including cheese, skim milk powder, whey products and lactose.

Fonterra & Abbott Joint Venture to Develop Dairy Farms in China
   Eoin Lowry writes details in the Irish Farmers Journal: New Zealand’s Fonterra and Abbott, the US pharmaceuticals and health care giant are to develop a dairy farm hub in China. The deal, subject to regulatory approval will see the two companies form a joint venture to invest a combined €220m ($300m).The hub will contain up to five dairy farms and more than 16,000 cows, which will produce up to 160m litres of milk annually. The herd will be made up with animals either imported, or sourced from Fonterra’s existing farm hubs.
   The first farm is expected to be completed and producing milk in the first half of 2017 and the remaining farms will commence production in 2018. All dairy cows will have genetics traceable to New Zealand, Australia, USA or Europe.
   “This would be Fonterra’s third farm hub in China and will complement our existing farming operations in Shanxi and Hebei Provinces that have been very successful,” said Fonterra chief executive, Theo Spierings.
   “Farming hubs are a key part of our strategy to be a more integrated dairy business in Greater China, contribute to the growth and development of the local Chinese dairy industry and help meet local consumers’ needs for safe, nutritious dairy products.”
   Read more at: http://goo.gl/dXqA54

Mielke Market Daily (A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update Associate Editor Lee Mielke)
   Last week’s rally in cheese prices was sustained this morning, and the barrels are back above $2 nut not by much. The Cheddar blocks traded 10 times, the price inching a little higher with every trade until the last 6 sold at today’s close of $1.9975/lb., up 2.75¢. You’ll recall they were up 2¢ Friday, with 7 cars trading hands. The Cheddar barrels ticked up 1.75¢, to $2.0050/lb., after jumping 2.75¢ Friday and 1.5¢ Thursday. The first car sold today was at $1.9925/lb. and the price inched up from there, but a bid at today’s closing price went unfilled.
   Class III futures jumped, with Aug. +27¢, Sept. +30¢, Oct. +24¢, Nov. +23¢, & Dec. +24¢.
   Cash butter saw 6 carloads run through the CME this morning and the price dropped to $2.35/lb. on the first 3 trades, but buyers kept buying and brought it back up, with the final sale at $2.37/lb. An unfilled bid finalized the day’s price however at $2.3750/lb., up 0.25¢ on the day after dropping 1.25¢ Friday.
   Grade A nonfat dry milk was unchanged this morning, holding at $1.7350/lb., with no activity.

Today’s Market Closing Prices 
Butter: Up 0.25¢, to $2.3750/lb.
Cheddar blocks: Up 2.75¢, to $1.9975/lb.   
Cheddar barrels: Up 1.75¢, to $2.0050/lb.
Grade A nonfat dry milk: Unchanged, at $1.7350/lb.
Class III milk (prelim.): July $21.43/cwt., +3¢; Aug. $20.97, +27¢; & Sept. $20.15, +30¢. Based on today’s CME settlements, the Third Quarter 2014 average now stands at $20.85, +20¢ from Friday. The Fourth Quarter average is now at $19.64, +24¢ from Friday. The First Quarter 2015 average is now at $18.36, +14¢ from Friday.

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Looking ahead:
   The Global Dairy Trade auction is tomorrow morning. USDA issues its monthly Livestock, Dairy, and Poultry Outlook Thursday morning and the June Milk Production report is out Friday afternoon.

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Tuesday on DairyLine:
  The new Margin Protection Program is news to some dairy farmers. Congressman  
        Colin Peterson wants farmers to be informed.
   Dr. David Reid on preventing mastitis, rather than treating it.

http://dairyline.com/tuesday,mp3