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Dairy Margins Slip in December

by Lee Mielke

Published: Friday, December 29, 2017

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

The latest Margin Watch from Chicago-based Commodity & Ingredient Hedging LLC reports that dairy margins deteriorated over the first half of December. "Lower milk prices more than offset the impact from cheaper feed costs," the MW states. "Margins are now negative through the first half of 2018, and only projected slightly above breakeven through the second half 2018."

"Milk prices continue to be pressured by the large global overhang of dairy product stocks, particularly nonfat dry milk and skim milk powder. The EU in particular is sitting on 365,000 metric tons of SMP, the equivalent of about one-third of U.S. annual NDM/SMP production. The European Commission rejected all purchase offers at their most recent Dec. 12 tender for SMP due to price, and has proposed removing the fixed purchase price requirement when Intervention reopens in March to limit or prevent a further build-up in stocks." The MW concludes, "The EU and Japan reached a historic trade agreement that will go into effect in March 2019 and lower tariffs on farm products including cheese, should provide the EU with a significant advantage to U.S. supplies."

In politics, President Trump signed a continuing resolution to avoid a government shutdown last Friday morning as well as his sweeping tax reform legislation.

The National Milk Producers Federation stated that the tax bill's final compromise to address the loss of the Section 199 deduction will "help protect farmer-owned businesses from a major tax increase at a time when America's farm sector is struggling with low commodity prices and reduced incomes."

"At issue is the loss of the benefit that both farmers and cooperative businesses enjoy from the Section 199 deduction, also known as the Domestic Production Activities Deduction (DPAD). This important provision of the tax code applies to proceeds from agricultural products marketed through cooperatives, making the Section 199 an important means of reducing taxation for farmers and cooperatives alike," said NMPF.

The Federation also praised passage of the disaster aid package, which will eliminate the existing $20 million annual cap on the Livestock Gross Margin program, enabling the USDA to offer coverage to more farmers in the current LGM program and provide new risk management options for dairy producers.

"As the bill moves forward, dairy farmers still badly need changes to the ineffective dairy Margin Protection Program (MPP)," NMPF stated in a press release, "and we strongly urge the Senate to include such changes when it takes up the disaster bill."

FC Stone's Dave Kurzawski points to a "silver lining in the dark cloud" in his Dec. 22 Early Morning Update. He says the newly passed tax bill "opens the door for more business expansion and the repatriation of funds (possibly up to $2.5 trillion) in early 2018. U.S. annual economic growth is approaching 3.5 percent in 2017, with no signs of that rate slowing in 2018 (first time above 3 percent since 2006)."

"We can't argue with the markets. They are not wrong and they fail to either curb production or entice new demand, or both. But there is an important concept to consider as you're wrapping those last-minute gifts and remember always: In boom economic years, on-farm income also booms. This may mean stronger commodity prices, including milk prices, than are expected in 2018."

Let's hope he's right.

Cash dairy prices weakened the week before Christmas. A somewhat bullish Milk Production report may have added some strength to the cheese and powder but traders were also anticipating the November Cold Storage report.

CME block Cheddar fell to $1.4350 per pound last Wednesday, lowest price since March 21, but jumped a nickel last Friday and closed at $1.4925, down 3¾ cents on the week, down 22¼ cents since Nov. 3, and 19¾ cents below a year ago when they dropped 11 cents. The barrels dipped to $1.40 last Wednesday, lowest price since July 10, 2017, but closed last Friday at $1.41, down 25 cents on the week, 14½ cents below a year ago when they dropped 14½ cents, and reversed the inverted spread to 8½ cents below the blocks. Nine cars of block traded hands on the week at the CME and 42 of barrel.

Cheese producers accepted spot milk at marked discounts last week, according to Dairy Market News, ranging $4 to $8 under Class III. Cheese sales remained steady to slow. DMN says there will be some allotted days off during the holidays but plants plan to ramp up cheese production to meet the abundant milk intakes.

Western cheese makers report solid domestic retail and food service demand has generally helped support the cheese market this fall. However, as holiday shipment obligations are fulfilled, there is concern that there may be a lull following the winter holidays, but before the football playoffs.

Cash butter finished the week at $2.18 per pound, down 6½ cents and 6¾ cents below a year ago. That's the first time in almost a year that it fell below a year ago. Seventeen cars found new homes on the week.

DMN says butter sales are on par with previous years. Holiday retail orders are completed, thus food service is now one of the priorities on the production side. Cream has been abundant but the market tone remains somewhat resilient.

The western butter market was steady to weak last week. Contacts report that prices are higher than expected as holiday orders have mostly been fulfilled and butter supplies are plentiful. Some buyers are expecting and waiting for further price decreases so they are limiting purchases to their immediate needs.

Cash Grade A nonfat dry milk set another record low 64¾ cents per pound last Tuesday but closed last Friday at 66½ cents, up three quarter cents on the week but 35½ cents below a year ago, with 17 cars exchanging hands on the week.

The Agriculture Department released its November Cold Storage report near the end of last Friday's trading and showed U.S. butter stocks were down 27 percent from October and 1 percent below November 2016. Total cheese was down 1 percent from October but 6 percent above a year ago. More details next week.

The first Class I base milk price of 2018 was announced by the USDA at $15.44 per hundredweight, down $1.44 from December 2017, $2.01 below January 2017, and equates to about $1.33 per gallon, down from $1.45 in December. It is the lowest Class I price since June 2017.

Penn State's December Dairy Outlook states, "The milk price forecast for 2018 is starting to solidify, and good news is hard to find. U.S. milk production growth has slowed, but global supply is still hampering future price increases." It adds, "Bearish factors keeping futures prices in check continue to include the heavy inventories of dried milk products in inventory in the E.U. as well as the expected milk production increase this year in the European Union."

Back on the home front, the Outlook reports that "USDA has calculated the Net Farm Income (profit earned on all farms across the U.S. from the sale of all commodities produced) will be up 3 percent from the previous year and will total $63.2 billion for fiscal year 2017. This is good news that Net Farm Income (NFI) has increased slightly year-over-year, but a sobering realization about NFIis that in 2013, NFIwas $ 129 billion."

"In the space of four years, the national income from agricultural production dropped by more than half. This staggering erosion of profit is being worked out in the ag economy in many ways. USDA just released figures showing that in those 4 years (2013-17) farm debt rose almost 20 percent. Eventually, if commodity prices do not rise, debt levels can't continue to rise because there will not be the cash flow to service the increased debt. Putting additional pressure in this area is the expected Federal Reserve actions this month. An announcement on an interest rate increase is widely expected. Obviously, the most direct impact of this interest rate increase on farm businesses is on the interest rate of lines of credit and short term variable rate loans," the Outlook concludes.

USDA's latest Livestock, Dairy, and Poultry Outlook, as always, mirrored much of the Dec. 12 World Agricultural Supply and Demand Estimates report and echoed the negative sentiment of the dairy markets.

Addressing the all-important feed equation, the Outlook stated: The 2017-18 price forecast for corn is $2.85 to $3.55 per pound, unchanged from last month's forecast at the midpoint of the range. The soybean meal price forecast is $295 to $335 per short ton, unchanged from last month. The alfalfa hay price in October was $152 per short ton, $3 more than September and $17 more than 2016.

"The fourth-quarter 2017 forecast for the size of the dairy herd was unchanged at 9.405 million head but the fourth-quarter milk per cow forecast was lowered to 5,675 pounds based on recent data. These changes result in a milk forecast of 215.7 billion pounds, 100 million pounds lower than the previous forecast.

"The forecast for the size of the dairy herd in 2018 was lowered to 9.435 million head, as lower milk prices are expected to lead to slower growth in the second half of the year. Based on recent data and lower expected prices, the milk per cow forecast was reduced to 23,250 pounds. With these changes, milk production is now projected at 219.3 billion pounds for the year, 400 million pounds lower than previously forecast."

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