Absence of New Data Causes Dairy Traders to Fear the Worst
Published: Friday, February 1, 2019
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
The depressed dairy markets were the key take away from last week's annual Dairy Forum in Orlando, put on by the International Dairy Foods Assn. Jerry Dryer, analyst and editor of the Dairy and Food Market Analyst newsletter, stated in the Jan. 28 Dairy Radio Now broadcast that it wasn't so much what was being said from the podiums but what was said in the hallways.
"People are blaming the government shutdown as much as anything for the significant declines in dairy product prices at the CME," Dryer reported. "The last data we saw was sorta bearish, and in the absence of new data, that bearishness intensifies and puts downward pressure on the market." He adds that people who are buying and selling dairy products and milk "don't want to be blindsided by data so it's much less painful to make a mistake at $1.20 than to make a mistake at $1.80. People are reluctant to bid prices or move prices higher," he explained.
The other component is the trade and tariff issues that haven't gone away. Dryer says there's no news on that front either. "We did not get export data that we should have. That's almost three weeks ago now, and we won't get it again this month the way things are shaping up so people tend to assume the worst."
When asked if any optimism was expressed, Dryer said that there were people forecasting some demand recovery and shrinkage in the milk supply and that prices could be better than they are now. Rabobank predicted a recovery from 2018 prices but they won't match 2017, he said, and "That's not much of a recovery."
Meanwhile, dairy farm margins were weaker over the first half of January due to lower milk prices, with feed costs relatively flat since the beginning of the year, according to the latest Margin Watch (MW) from Chicago-based Commodity and Ingredient Hedging LLC. The MW stated, "The milk market has experienced mixed price action though, with Class III futures under pressure while Class IV futures have strengthened from a firming powder market."
It cited the latest Global Dairy Trade (GDT) auction where skim milk powder SMP prices soared 10.3 percent to $2,405 per metric ton (MT), driving the weighted average value for the index up 4.2 percent to $3,057 per MT for the event.
"Stronger Asian demand for milk solids appears to be the catalyst for recent strength as supplies slow from the U.S. and Europe," the MW states. "EU intervention stocks of SMP have steadily declined to just 48.5 million pounds from nearly 800 million just over a year ago. In its first tender of the year, the European Commission sold 176.9 million pounds of SMP from its intervention storage program which has been the largest sale to date. At the current rate, SMP intervention stocks will be completely depleted by June and while the storage program has represented a huge cost to European taxpayers, it has effectively removed a large supply overhang from the global market which is supporting both spot NDM and Class IV futures prices at the CME."
The MW cautions, "While there is renewed optimism with Class IV prices now projecting above $16 per hundredweight concerns remain from both ongoing trade issues with China and Mexico as well as fallout from the partial government shutdown." "Feed costs have held relatively steady, although drought in Brazil has reduced expectations for their soybean crop," the MW concludes.
So what is responsible for the dilemma dairy producers find themselves in? Is it over production or under consumption? Perhaps it's a bit of both, but the Wisconsin-based American Dairy Coalition's Laurie Fischer points the finger to retailers in her Jan. 22 op-ed.
"At a time when thousands of U.S. dairy operators of all sizes are starved for revenue, declaring bankruptcy or selling off multi-generational operations, the latest inequity is a particularly cruel twist of the knife," writes Fischer. "Squeezed on virtually every front, multi-front trade wars, eroding international markets, government shutdowns, etc., the entire dairy sector is feeling the vice tighten even more from a direction they never anticipated, the retail sector."
She cited the National Dairy Products Sales Report, specifically the December Class III cheese price at 27.4 cents (or 16.6 percent) lower than December 2017, but the U.S. retail average price for Cheddar cheese in December, according to CPI data, was 41 cents (or 8.3 percent) higher than December 2017."
"That gap," Fischer charged, "the difference between what consumers are paying and what dairymen are earning, is just one factor contributing to a national cheese glut of 1.4 million pounds of Cheddar. Even as supermarkets are selling cheese at artificially high prices, the dairy producer is earning only 25.6 percent of the average retail price, the lowest proportion since April 2012."
Fischer warned "There's no magic bullet on the horizon: A shakeout will continue in the dairy sector until markets stabilize and supply and demand realign. Until then, dairy professionals at all levels are working on a day-by-day, if not hour-by-hour, basis to keep their operations afloat. Cheese sales will be a critical component of that eventual rebound," she said.
Cash dairy prices were mixed in the shortened Martin Luther King Day holiday week with the Cheddar blocks losing a penny, closing last Friday at $1.39 per pound,
8 ¼ cents below a year ago when they lost 9 ¼ cents. The barrels plunged to $1.16 last Wednesday, lowest price since July 23, 2009, but closed last Friday at $1.18, down 2 cents on the week, 14 cents below a year ago and 21 cents below the blocks. Seven cars of block traded hands on the week at the CME and 8 of barrel.
Some cheese plant schedules are back to normal, according to Dairy Market News, while others relay lighter workweeks. Winter weather, particularly at customer bases in the Northeast, impacted demand for a number of regional contacts and demand was slow for most types of cheese producers. Spot milk intakes were light on the week and most spot prices ranged from 50 cents under to $1 over class. Cheese barrel inventories are assumed to be heavy nationwide, and that has impacted markets negatively, as barrel prices fell.
Western cheese makers report mixed demand. "While markets for Mozzarella are strong, as expected near the apex of the football and pizza seasons, other signals suggest total cheese demand is missing its mark." Contacts indicate retail demand has been adequate but exports have yet to take off. Cumulated, DMN says, "The pull from cheese buyers has not been able to overtake active cheese production. As a result, contacts say there has been little substantive effect on drawing down the large cheese inventories. Until improved demand or reduced production can bring cheese stocks into better balance, low prices will be a symptom of those heavy supplies." The loss of this week's Cold Storage report adds to that speculation.
Butter dipped to $2.22 per pound last Wednesday but closed last Friday at $2.2450, up a half-cent on the week and 11 ½ cents above a year ago, with 7 cars sold.
DMN says little has changed as far as access to cream for butter producers. If anything, plant managers suggest more cream is expected in upcoming weeks. Winter weather in the Midwest and Northeast has bottlers busier. Thus cream availability is steadily increasing. Churning continues and butter stocks are climbing. Demand is healthy to slightly seasonally lower but butter markets are "steadily bullish." Butter markets were expected to dip a little earlier in the year, but now expectations have shifted toward continued steady-bullishness.
Grade A nonfat dry milk fell below $1 per pound last Wednesday but rallied to close last Friday at $1.0125, down 1 ¾ cents on the week but 30 ¼ cents above a year ago, with 14 cars selling on the week.
HighGround Dairy says "Strength is building in skim and whole milk powder prices in the EU, Oceania and South America. Milk production has been declining in key regions of the EU and Argentina, but production is looking stronger out of New Zealand. Export demand from Asia has been a key factor in the recent rally"
Spot dry whey saw the largest single day declines since Oct. 23, 2018, losing 4 cents last Tuesday and 4 ½ cents last Wednesday. It closed last Friday at 40 ½ cents per pound, a dime lower on the week, with 21 sales reported.
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