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Big Storm Triggers Buying Frenzy, Immobilizes Distribution Network

by Lee Mielke

Published: Friday, February 6, 2015

The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."

Like the proverbial little boy who cried wolf, weather forecasters were apologizing last Tuesday as their predicted mega storm for the Northeast did not deliver the blow they anticipated. They had warned that the storm could bring up to 2 feet of snow and possibly the biggest in decades, if not the biggest ever. Well over 5,000 flights were canceled, New York shut down its subway system for the first time ever due to weather, and government officials ordered residents to stay home. Television news reports showed grocery stores being emptied as residents purchased food and essentials in preparation to hunker down and ride it out.

As is always the case, storm-induced buying strips store shelves, including fluid milk and dairy products, which in itself creates challenges to refill those shelves, let alone get milk trucks to farms to pick up the milk and transport it to processing plants. Resulting power outages certainly add to the challenge.

While some areas were indeed impacted with snow and cold, perhaps prayers were answered that it was not as severe as expected, though costs and the emotional toll are huge. Officials at the National Weather Service stated that they would reevaluate their computer models and reexamine how they called this one.

Dairy Market News reported that the snow and ice storm that did occur delayed a few milk deliveries in the Northeast, but blizzard conditions completely immobilized distribution in other areas of the region.

On a brighter note, dairy product prices strengthened the last week of January, particularly on butter and nonfat dry milk. Cash block Cheddar cheese closed last Friday at $1.5325 per pound, up 5¼ cents on the week but still 82¾ cents below a year ago. The barrels finished at $1.5050, up 6 cents on the week and 81½ cents below a year ago. Five cars of barrel traded hands on the week. The ever lagging NDPSR-surveyed U.S. average block price slipped to $1.5701 per pound, down 1.1 cent, while the barrels averaged $1.5594, down .7 cent.

Strong cheese production in the Midwest continues to be driven by the volumes of milk being received, according to Dairy Market News. "Cheese plants reach peak efficiencies when running full schedules so to that extent, good milk availability is a positive," DMN said. "The challenge is in selling higher cheese volumes to actualize the efficiencies. There are Midwest plants where cheese inventory is growing, but other plants are experiencing good order interest sufficient to keep inventories more in a desired balance. Even where inventory levels are higher, there is awareness of the situation but mostly a feeling that inventories are manageable," says DMN.

Spot loads of milk were available at $2 under to $1.50 over class, but most plants were satisfied with regular milk supplies. Some cheese buyers are paying premiums to Midwest manufacturers of 5 to 7 cents above market, says DMN. Western cheese market activity is light to moderate and the undertone is unsettled to steady depending on location, variety and demand.

Cash butter came back to life after holding steady the previous week and finished Jan. 30 at $1.75 per pound, up 20 cents on the week and the highest level since Dec. 15, 2014 but still 13 cents below a year ago. Seventeen carloads traded hands on the week. NDPSR butter averaged $1.5550, up .4 cent.

Print butter churning is down for some manufacturers as retail demand is lower than expected, according to DMN. Bulk butter churning remains active. Offers are light as inventory levels are clearing. Bulk butter buying is down as current prices do not support heavy buying. Sellers are waiting for the market to move up. The Western market was slightly firm at midweek but the undertone remains on the unsettled side. The Foreign Ag Service reports January-December U.S. butter quota imports at 14.9 million pounds, up 37 percent from 2013.

Cash Grade A nonfat reversed gears this week and topped $1 per pound for the first time since Dec. 23, closing last Friday at $1.07, up 8¾ cents on the week. Thirty-four cars were sold in the spot. NDPSR powder averaged $1.0022, down .8 cent, and dry whey averaged 58.52 cents per pound, down .7 cent.

New Zealand Forecast

A surprise announcement was made last Wednesday by Fonterra, New Zealand's largest dairy cooperative, that it has reduced its milk volume forecast for the 2014-15 season to 1,532 million kgMS, reflecting the impact of dry weather on production in recent weeks. The new forecast is 3.3 percent lower than the 1,584 million kgMS collected last season. The previous milk volume forecast, made in December last year, was 1,584 million kgMS.

Group Director Co-operative Affairs Miles Hurrell said daily milk production was now 6.1 percent lower than last season, as farmers appear to be using more traditional practices to manage their farms with the low payout forecast.

"In the first half of the season, excellent pasture conditions resulted in milk volumes being higher than the previous season," he said. "The situation has changed significantly over the course of this month. In some regions where pasture quality has declined markedly since mid-January, we are seeing some farmers drying off cows early and there also appears to be a reduction in feed supplements, as the economics do not support widespread use this season."

When asked if that meant happy days were here again in last Friday's DairyLine, Matt Gould, market analyst for the Dairy and Food Market Analyst newsletter, said, "Not quite." He didn't believe the uptick in cash cheese was in response to the Fonterra announcement but said the strength in nonfat dry milk would be.

"Fonterra is saying that they see milk production for the first half of the production year to be down about 15 percent," Gould explained, "After seeing significant gains earlier in the year, "so now they're being offset." He cautioned, "That's a big number but, for perspective, they're two-thirds of the way through the season." Some of Gould's contacts question that figure, he said.

Class III contracts will see some "temporary strength here," according to Gould, as food service buyers and aged cheese come back to the market but he emphasized that it will be temporary as we still are struggling with export sales in the first half of the year so inventories will build. "It's a temporary blip in Class III."

"We're putting in a floor on the international market," he said. "We see milk production slowing in Europe, it's definitely declining in New Zealand, and when the Global Dairy Trade auction occurs (this) week, we should see a rise in prices."

Domestically, Gould said we have several factors at play. "We have strength in butter, we have weakness, in my opinion, in cheese, and nonfat dry milk is heavily related to the world market so there is forward strength, at least steadiness," he concluded.

Cooperatives Working Together accepted 4 requests for export assistance this week to sell 405,651 pounds of Cheddar and Gouda cheese and 440,925 pounds of 82 percent butter to customers in Asia, the Middle East and Central America. The product will be delivered in February through July 2015 and put's CWT's 2015 year-to-date export totals to 4.215 million pounds of cheese and 13.922 million pounds of butter to 14 countries on four continents.

Consumers Are Key

In her keynote speech at last week's Dairy Forum 2015, Connie Tipton, president and CEO of the International Dairy Foods Assn., outlined her vision of the dairy landscape through 2020. Noting that consumers are the driving force, Tipton called for broader industry collaboration on policy and regulatory changes that would encourage industry innovation to meet escalating consumer demands and growing global markets.

Tipton addressed a record crowd of 1,050 dairy producers, processors, suppliers and other industry participants gathered at the Boca Raton Resort and Club in Boca Raton, Fla., last week for the 30th annual Dairy Forum.

"Today's segmented consumers require a rich array of products far beyond the traditional milk and milk products that dairy companies have provided for decades," Tipton said. "Collectively, however, these consumers are just as demanding; they crave in-depth information about the ingredients and processing techniques used, and can be harsh critics on topics such as genetically modified organisms (GMOs) and animal care. Many new factors may 'make or break' the consumer purchase today."

"Engaging the consumer is a must, and innovation is key," Tipton warned. "But many impediments and hurdles still exist. Whether they are milk pricing, product standards of identity or restrictive labeling requirements, they all add up to a straightjacket on innovation and marketing, which we can ill afford in today's dynamic global marketplace. Deregulation would help to spawn greater competition, innovation and consumer choice."

She charged that "While global demand is a boon to the dairy industry, the U.S. federal milk pricing system in particular continues to have a chilling effect on some sectors. Now is the time to move away from our domestic pricing system. And now is the time to allow milk to flow to its highest value use dictated by market forces, not regulations," Tipton said.

She noted that IDFA boards of directors have taken the first step by adopting a policy to promote market-based pricing rather than regulated pricing but warned it will take more work for the industry to embrace and work toward this goal.

Outdated standards of identity also remain barriers to innovation and growth, Tipton said. Commending industry innovators for attempting new approaches and products, she called for industry collaboration to convince the Food and Drug Administration to allow more "better-for-you" product innovations to fit within the dairy standards of identity.

"We all know that First Lady Michelle Obama has put a major focus on combating childhood obesity and healthier eating, so we are urging the White House and FDA to take another look at how standards are interpreted, in hopes of getting the greater flexibility it takes to offer milks to meet varying needs," she said.

"It's time to push the envelope," Tipton concluded. "It's time to take advantage of our opportunities, and it's time to surmount our challenges and be the best that we can be. It will take collaboration and cooperation, and also entrepreneurship and innovation. But I am confident we will succeed if we take steps together."

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