DairyBusiness Update: July 22, 2014

June Butter Stocks Down 42% from 2013
   The Agriculture Department’s preliminary June Cold Storage report, issued this afternoon, shed some light on what’s happening in the U.S. cash markets, particularly in butter.
   Butter stocks on June 30, 2014 totaled 186.13 million pounds, down 6.4 million pounds or 3 percent from May and 132.8 million pounds or a whopping 42 percent below June 2013.
   American type cheese, at 657.53 million pounds, was up 1.1 million pounds from May or virtually unchanged, but 53.1 million pounds or 7 percent below a year ago.
   The total cheese inventory stood at 1.061 billion pounds, down about 4 million pounds or virtually unchanged from May, but 87.8 million pounds or 8 percent below a year ago.

CWT Sends Another 4.3 Million Pounds Sailing
   Cooperatives Working Together (CWT) accepted 17 requests for export assistance today from Dairy Farmers of America, Michigan Milk Producers Association, Northwest Dairy Association (Darigold) and Tillamook County Creamery Association to sell 3.646 million pounds of Cheddar cheese, and 661,387 pounds of whole milk powder to customers in Asia, Europe, North Africa, Central and South America and Oceania. The product will be delivered through January 2015.
   Year-to-date, CWT has assisted member cooperatives in selling 78.024 million pounds of cheese, 48.767 million pounds of butter and 16.067 million pounds of whole milk powder to 41 countries on six continents. These sales are the equivalent of 1.965 billion pounds of milk on a milkfat basis.

Dairy’s Crystal Ball is “Milky”
   The volume of dairy commodities China has imported during the first half of the year remains strong, and June was no different. But after observing the sharp dairy product price declines on the Global Dairy Trade auction platform over the past few months, HighGround Dairy’s Eric Meyer warns that it appears to be foreshadowing a slower second half of the year as many of our contacts with ‘boots on the ground’ in China have suggested.
   Historically, Chinese milk powder imports trail off heading into the Northern Hemisphere’s summer season as the New Zealand sales cycle is at its seasonal low prior to the start of the new milking season. And following that pattern, June was the slowest month for whole milk powder imports since last September.
   But the question everyone wants an answer to is if China will return to the market after taking a less aggressive stance on GDT over the past few months. In USDA’s most recent Dairy: World Markets & Trade Report, the Foreign Ag Service revised its 2014 China WMP import forecast UP to ONE MILLION METRIC TONS. In order to achieve that goal, China would need to pull an additional 470,000MT or 50% more than July-Dec ’13. With rumors of large inventories of milk powder in China and traders there looking to unload product off-shore at sharp discounts, we believe this may be a lofty volume target.
   More important, the tide seems to have turned in most regions of the world on milk production. Great growing weather and sharply less-expensive feed costs has the outlook for milk production growth in the US, EU, Oceania to be strong as well as in importing regions like China & Mexico which may reduce the need for imports. Even if China’s needs remain strong for some time, the world’s dairy farmers are responding with stronger supplies.
   Read more of Meyer’s perspective by writing him at ericm@highgroundtrading.com.

Corn Price Premiums Fading
   That’s the message from Dr. Darrel Good of the Department of Agricultural and Consumer Economics at the University of Illinois, in his recent FarmDocDaily posting. Corn was the primary focus of the agricultural commodity complex beginning in the 2006-07 marketing year and continuing through the 2012-13 marketing year. Corn prices during that period were supported by a rapidly growing domestic ethanol industry that required   more acres of corn and by relatively poor U.S. corn yields in 2010, 2011, and especially in 2012 that kept corn supplies very tight.
   The dominant role of corn prices in the crop sector during that seven year period is revealed by the ratio of marketing year average prices. The ratio of the average farm price received for soybeans and corn was 2.83 for the 2005-06 marketing year and averaged only 2.28 for the period from 2006-07 through 2012-13. Similarly, the ratio of the average farm price received for wheat and corn was 1.71 for the 2005-06 marketing year and averaged only 1.34 for the period from 2006-07 through 2012-13. The ratio of the price of soybean meal in central Illinois and the average farm price of corn (on a per pound basis ) was 2.44 for the 2005-06 marketing year and averaged only 2.06 for the period from 2006-07 through 2012-13. Corn, wheat, soybean, and soybean meal prices during the seven year period were all high relative to livestock and livestock product prices as evidenced by declining livestock/feed price ratios. The ratio of specific livestock or livestock product prices to feed prices reached the lowest levels at different times that ranged from July 2012 through August 2013.
   The premium of corn prices relative to other crop prices began to fade during the 2013-14 marketing year. Current estimates or forecasts for the 2013-14 marketing year reflect a soybean/corn price ratio of 2.92, a wheat/corn price ratio of 1.54, and a soybean meal/corn price ratio of 3.02. The soybean/corn price ratio will be higher than in the 2005-06 marketing year. Increasing livestock prices and declining feed prices have restored livestock/feed price ratios to the highest levels in at least four years.
   The price of corn for the 2014-15 marketing year has declined by about $1.25 since early May and the price of corn relative to most other agricultural commodity prices has declined sharply. Based on the closing prices for December 2014 futures (November 2014 futures for soybeans) on May 9, 2014 and July 18, 2014 the soybean/corn price ratio increased from 2.46 to 2.87 and the soybean meal/corn price ratio increased from 2.18 to 2.60. The wheat/corn price ratio is about unchanged at 1.5. 
   The most dramatic changes have been in the livestock/corn price ratios. The lean hog/corn price ratio increased from 18.86 to 27.37, the live cattle/corn price ratio increased from 29.03 to 40.83, and the milk/corn price ratio increased from 3.73 to 5.02.
   The soybean/corn price ratio is of particular interest. In the July WASDE report, the USDA forecast 2014-15 marketing year ending stocks of corn at 1.801 billion bushels, which represents a marketing year ending stocks-to use ratio of 13.5 percent. Similarly, marketing year ending stocks of soybeans were forecast at 415 million bushels, which represents a marketing year ending stocks-to-use ratio of 11.7 percent. 
   On the surface, similar stock levels for corn and soybeans would suggest that the soybean/corn price ratio would be near a more normal level of about 2.4. As indicated, the current new crop futures price ratio is near 2.9. Based on harvest delivery cash bids in central Illinois, the current soybean/corn price ratio is 3.05. Prices are still adjusting to supply and consumption prospects for the upcoming marketing year so that price ratios may continue to change. However, the declining and increasingly low price of corn relative to soybeans suggests that the market currently expects the marketing year-ending stocks-to-use ratio for corn to be much larger than projected by the USDA. 
   Such expectations are based on expectations of a much higher corn yield and a much larger corn crop than forecast in the July WASDE report. As suggested in last week's newsletter, even a yield about five bushels higher than forecast by the USDA would not point to average prices as low as currently reflected in the market. Yield expectations are obviously increasing as the growing season progresses and widespread and persistent stressful weather is avoided.
   If the 2014 corn crop reaches the lofty levels currently expected, the key to prices after harvest will be the response by users of corn. The low price of corn relative to livestock prices, relative to other feed ingredients, and relative to ethanol prices points to the potential for a surprisingly large consumption response. In that case, the seasonal pattern of corn prices during the 2014-15 marketing year would be expected to follow a more typical large crop pattern--lowest near harvest and then increasing as the  marketing year progresses. 
   The USDA's first survey-based forecast of the size of the U.S. corn crop to be released in three weeks will go a long way in determining the likely level and pattern of corn prices during the year ahead.

Fonterra Takes Milk Safety & Quality Message to Youtube
   New Zealand-0based Fonterra Co-operative Group Limited has launched the second installment of its Farm Focus YouTube series showcasing responsible dairying initiatives taking place on New Zealand dairy farms.
   The latest series focuses on milk safety and quality, and features dairy farmers from Invercargill, Waihi and Waiuku discussing the importance of sharing knowledge, utilizing technology and high standards of animal welfare.
   Supply Fonterra Program Director, Lisa Payne, says the second Farm Focus series shows the passion and dedication dairy farmers have to delivering the top quality milk that goes into Fonterra’s dairy products.
“Safety and quality start on-farm, and require absolute commitment to maintaining high standards and a fastidious approach to detail,” she says.
In this series:
• A former Fonterra tanker operator-turned farmer shows how he applied his knowledge of safety and quality standards gathered from years collecting milk to his farm
• Two husband and wife teams discuss how they combine technology, animal science and training to produce consistently safe, high quality milk
• Another husband and wife team show how a covered barn helps care for the herd during cold winter months and calving, and increases milk production
   Payne says dairy farming can be complex, requiring a delicate balance of inputs and outputs, and that Fonterra farmers are some of the best in the world at getting high productivity from their herds while ensuring superior standards of animal welfare and top quality milk.
   “What I want people to take away from watching these videos is the importance of great people, healthy animals and attention to detail in the production of quality New Zealand milk, and how what happens on-farm underpins the trust customers and consumers have in Fonterra’s dairy products,” said Ms Payne.
   The four Farm Focus videos are now available on Fonterra’s YouTube channel. The videos will also be posted on Fonterra’s Facebook and Twitter pages under the hashtag #farmfocus.

Mielke Market Daily
(A daily wrap-up of dairy markets and the things affecting them, from DairyBusiness Update Associate Editor Lee Mielke)
   Cheese traders, anticipating this afternoon’s June Cold Storage report, inched the Cheddar blocks 0.25¢ higher on two trades this morning, putting the 40 pounders at $2.03/lb., highest price since June 18. Two bids at that price went unfilled. The 500lb. barrels held at $2.07/lb., 4¢ above the blocks, but a bid at that price went unfilled.  
   FC Stone risk management consultant, Derek Nelson, wrote in this morning’s Insider Opening Bell that "The strength in cheese has been led by the barrel, which looks poised to make a run to $2.10.”
   An unfilled bid shot butter up another this morning, the fourth consecutive session of gain, jumping to $2.58/lb., 23¢ away from the record high $2.81/lb.
   Cash Grade A nonfat dry milk ended three sessions of loss this morning, holding at $1.6750/lb. One car was sold at that price and a bid at $1.64/lb. was left on the board.

Today’s Market Closing Prices 

Butter: Up 7¢, to $2.58/lb.
Cheddar blocks: Up 0.25¢, to $2.03/lb.   
Cheddar barrels: Unchanged, at $2.07/lb.
Grade A nonfat dry milk: Unchanged, at $1.6750/lb.
Class III milk (prelim.): July $21.52/cwt., -3¢; Aug. $21.60, +20¢; Sept. $20.68, +26¢, Oct. $20.00, +18¢; Nov. $19.45, +5¢; & Dec. $19.12, -3¢. Based on today’s CME settlements, the Third Quarter 2014 average now stands at $21.27, +15¢ from Monday. The Fourth Quarter average is now at $19.52, +6¢ from Monday. The First Quarter 2015 average is now at $18.25, +4¢ from Monday.

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Looking ahead:
   The Agriculture Department announces the August Federal order Class I base milk price tomorrow afternoon and issues the weekly National Dairy Products Sales Report (NDPSR) prices. The monthly Livestock Slaughter report is issued Thursday afternoon.

  --- 
Wednesday on DairyLine:
   It’s been an outstanding year so far for corn and soybeans. We hear details from
        USDA’s Brad Rippey and Mark Harris, plus, Darrel Good from the Univ. of Illinois.
   We also talk about shredlage with Dr. Randy Shaver from the University of Wisconsin-
         Madison.

http://dairyline.com/wednesday.mp3