DairyBusiness Update: July 16, 2014

Post GDT: Index Sets New 21 Month Low
  
So much for the soft landing in global dairy commodity prices. That word from HighGround Dairy’s Eric Meyer. Meyer writes that a bearish punch in the stomach collectively hit New Zealand dairy farmers on Tuesday as sharp declines were widespread during this week’s GDT auction and even those that were already bearish going into this week’s event had to be surprised at the nature of the declines.
   And while recent import/export data has shown other countries have returned to the table with increased volume, it has not been enough to make up for the recent lack of interest from China and the growth in global milk supply as a result of the 2013/14 bull market. It is only a matter of time before Fonterra makes a swift downward adjustment to their payout price for the upcoming 2014/15 season.
   Meyer warned: This report should also put US dairy farmers on notice that the lofty profit margins seen across the forward curve may not be there once the domestic inventory problem on butter and cheese have been corrected.
   At this point, there are few that see any major supply issues for a while and therefore any potential bounce in global prices would be dependent on re-emerging demand. When looking at a number of recent trends in food commodity prices (grains, other animal proteins, etc.), the demand outlook does not look promising.
   While the slide in dairy commodity has been swift and well-deserving of a corrective bounce, we find this market has little to cling to from a bullish standpoint in the near term and the potential for more downside is possible if buyers remain largely on the sidelines.
   Read the rest of Meyer’s analysis by writing him at: dairy@highgroundtrading.com.

Dairy Margins are Flat
   Dairy margins were largely flat since the end of June, as lower milk prices and lower feed costs largely offset each other over the past two weeks, according to the latest Margin Watch from Chicago-based Commodity & Ingredient Hedging LLC.
   From a historical perspective, margins remain very strong at well above the 90th percentile of the past 10 years through the first half of 2015. Although deferred milk prices have declined recently, the market is drawing fundamental support from the latest USDA WASDE report which lowered the annual 2014 milk production forecast to 205.9 billion pounds from 206.1 billion previously. The reduction was due to slower growth in milk per cow, and USDA also noted expectations for robust domestic demand and stronger NDM/SMP exports to support prices.
   The 2014 All-Milk price is expected to average between $23.25 and $23.55/cwt., which would represent a new all-time high.
   Feed prices have continued to be pressured by a negative post-report drift from USDA’s Quarterly grain stocks and acreage figures as well as the latest July WASDE. Old-crop corn ending stocks were raised 100 million bushels from last month to 1.246 billion while new-crop ending stocks increased 75 million bushels to 1.801 billion. New-crop soybean ending stocks showed an even larger increase of 90 million bushels or 28% from June to 415 million based on the larger production forecast from increased acreage.
   Neither the corn nor soybean ending stocks factor in the potential for a larger yield which was left unchanged this month. Current weather conditions suggest both the corn and soybean yield forecasts will be increased in the August WASDE.
   Our clients continue to use a variety of strategies to protect forward profit margins. Historically low implied volatility is making flexible strategies more attractive, and use of these strategies has become increasingly popular even in spite of the current margin strength.
   For additional details log on to www.cihmarginwatch.com.

Cream S t r e t c h / Cheddar Output Up
   Butter producers in the Northeast, in some cases, remain tolerant to the strong pull on tight cream supplies by other cream based dairy manufacturers, reports Dairy Market News. In general, inventories are adequate for satisfying near term contracts. While some manufacturers benefit from current cream prices, butter stock requirements that address consumers' looming Q4 holiday needs are being considered.
   Sufficient Class III milk volumes contributed to elevated cheddar production, as cheese plants work full schedules throughout the week. A few cheese makers are using condensed skim to increase vat yields, as component levels decline.  Mozzarella sales have slowed, with some manufacturers expecting interests to surge around mid-August.  Stocks are marginally expanding with increases in production.

Range in Revenues and Returns Possible for Corn in 2014
   The U.S. Department of Agriculture released a revised World Agricultural Supply and Demand Estimates (WASDE) report on July 11, 2014. In this report, the 2014 Market Year Average (MYA) price for corn is projected to fall between $3.65 per bushel and $4.35 per bushel. Revenues and farmer returns are estimated for prices in this range given an average and high yield. Crop insurance and commodity title payments are included in estimates. Given this price range, there is about a $100 per acre range in which per acre returns can fall, according to the latest FarmDoc posting by Dr. Gary Schnitkey, of the Department of Agricultural and Consumer Economics at the University of Illinois. Farmer returns likely are negative for cash rented farmland, given that costs are near average. Farmer returns for share rented farmland likely will be low.
   Returns from an acre of corn production are calculated for three price scenarios:
The low price in the WASDE range for the 2014 marketing year: $3.65 per bushel
The mid price in the range: $4.00 per bushel.
The high price in the range: $4.35 per bushel.
   For each Market Year Average (MYA) price, a harvest price is needed so that crop insurance payments can be calculated.  Based on the average difference from 1972 through 2013, the harvest price is set $.10 per bushel lower than the MYA price. 
   There is variability in the relationship between the harvest price and the MYA price over time, with extremes occurring in 1974 (harvest price was $.78 above the MYA price) and 2007 (the MYA price was $.62 above the harvest price). As a result of this variability, there can be variations in the relationship between crop revenue and crop insurance payments from those shown in this article.
   Two yield scenarios are presented. The first is 197 bushels per acre, representing the average yield for central Illinois farmland with high productivity. Returns also are estimated for a high yield of 220 bushels per acre. These yields are selected based on expectations of above average yields for 2014. Similar to all years, yield experiences in 2014 will range across farms, with some farms having yields above 220 bushels per acre and some farms having below average yields. Generally, lower yield scenarios will result in lower returns and higher yield scenarios will result in higher returns, given the same price and costs.
   Read the complete posting at: http://farmdocdaily.illinois.edu/2014/07/range-in-revenues-and-returns-corn-2014.html.

Lagging NDPSR Prices:  Butter Up 3 Cents NFDM Up 2.6 Cents      
   The latest Agricultural Marketing Service’s National Dairy Products Sales Report (NDPSR), released this afternoon, shows the U.S. average block Cheddar cheese price at $2.0315/lb., down 0.9¢ from the week before, while the barrels averaged $2.0502, up 0.2¢. Butter gained 3¢, hitting $2.3120/lb. Nonfat dry milk averaged $1.8845/lb., up 2.6¢, and dry whey averaged 68.76¢/lb., down 0.7¢. These prices are used in determining Federal order Class milk prices.

California Powder Price Down 1.2 Cents
   The California Department of Food and Agriculture announced its latest surveyed nonfat dry milk prices at $1.8043/lb. for the week ending July 11, on sales of 11.7 million lbs. The price was down from $1.8161/lb. the week before, on sales of 14.23 million lbs.

WUD to host Margin Protection Program workshops
   Western United Dairymen will host a series of informational workshops in August on the new Margin Protection Program, which is part of the 2014 Farm Bill signed into law earlier this year. There will be 11 workshops held throughout August at dates and locations which will be announced soon. The first workshop is set for Aug. 11 in Orland.  The workshops will be open to anybody interested: WUD members, nonmembers, their bankers and CPAs as well as allied industry members.
   WUD President Tm Barcellos said, “This is a tool that will be available to all U.S. dairy producers. WUD wants to ensure California dairymen are comfortable enough in understanding the program details and how it can affect their operation to make the participation decision that is best for them.”
   Participation in the Margin Protection Program is voluntary. For those who choose to enroll, it should help prevent the type of catastrophic losses of equity that distressed so many dairy producers in 2009. The risk management program will help address margin volatility by targeting combinations of low milk prices and high feed costs. But as with any risk management tool, understanding the nuts and bolts is crucial to the program’s efficacy.
   The workshops will cover how the program works; how the program would have performed in previous years; what this means for California dairy producers; pros and cons of the program; available resources to producers and a question and answer period.

Mielke Market Daily (A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update Associate Editor Lee Mielke)
   Cheese traders await Friday afternoon’s June Milk Production report but, in the meantime, there’s not a lot for them to feed from, other than yesterday’s GDT auction but that doesn’t appear to be affecting things much. They took the 40lb. Cheddar blocks to $2.0050/lb. on the second trade this morning but the third and final sale was at $2.0025/lb., up another 0.25¢, following a 0.25¢ nudge yesterday, and 2.75¢ on Monday. An uncovered offer at $2.0050/lb. got no response. Ever see a barrel roll uphill and then rest on top of a block? They’re doing it in Chicago, though the pace is slowing, up just 0.75¢ today, to $2.04/lb., following a jump yesterday of 2.75¢ and 1.75¢ on Monday. Six cars were sold this morning which incrementally rolled the barrels up to $2.0550/lb., with the final sale at $2.04/lb., 3.75¢ above the blocks. Blocks are characteristically 3-5¢ above the barrels. A bid at $2.04/lb. went unfilled.
   Class III futures were up, Aug. +25¢, Sept.,+25¢, &Oct.+7¢.
   "The global picture is price weakness now," says Dave Kurzawski, senior broker at FCStone, in Chicago. "Whether it’s short-lived or not has yet to be determined, but the global price of dairy is weaker than that of the US.” “At the very least, global prices are to be treated as a red flag for us in the US," Kurzawski warned.
   After 13 carloads of butter being sold yesterday, all was quiet today. The price remained at $2.39/lb. and there was no activity. The price inched up 0.25¢ Monday and 1.5¢ yesterday, following Friday’s 1.25¢ slippage.
   Grade A nonfat dry milk was unchanged for the 4th consecutive session this morning, holding at $1.7350/lb., but 2 cars traded hands at that price today. A bid at $1.7050/lb. was left on the board as was an offer at $1.75/lb.

Today’s Market Closing Prices 
Butter: Unchanged, at $2.39/lb.
Cheddar blocks: Up 0.25¢, to $2.0025/lb.   
Cheddar barrels: Up 0.75¢, to $2.04/lb.
Grade A nonfat dry milk: Unchanged, at $1.7350/lb.
Class III milk (prelim.): July $21.46/cwt., Unchanged; Aug. $21.27, +25¢; Sept. $20.35, +25¢, Oct. $20.00, +7¢; Nov. $19.50, Unchanged; & Dec. $19.20, -1¢. Based on today’s CME settlements, the Third Quarter 2014 average now stands at $21.03, +17¢ from Tuesday. The Fourth Quarter average is now at $19.57, +2¢ from Tuesday. The First Quarter 2015 average is now at $18.29, +3¢ from Tuesday.

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Looking ahead:
   The Agriculture Department issues its monthly Livestock, Dairy, and Poultry Outlook tomorrow morning and the June Milk Production report is out Friday afternoon.

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Thursday on DairyLine:
   NMPF has endorsed an animal outbreak plan with Canada. Chris Galen reports.
   Dr. Tom Earleywine discusses on-farm pasteurizers in this month’s “We Care For Calves” segment.

http://dairyline.com/thursday.mp3

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