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USDA Cuts Milk Output Estimate, Raises Price Projection for 2019

by Lee Mielke

Published: Friday, April 19, 2019

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

The Agriculture Department lowered its 2019 milk production estimate for the fifth consecutive month in its latest World Agricultural Supply and Demand Estimates report issued April 9, as higher milk cow numbers are more than offset by lower expected growth in milk per cow for the year.

2019 production and marketings are now estimated at 219.5 and 218.6 billion pounds, respectively, down 200 million pounds on both from last month's estimate. If realized, 2019 production and marketings would be up just 1.9 billion pounds, or .9 percent, from 2018.

The 2019 fat basis import forecast was unchanged from last month, but the export forecast was lowered on slower expected shipments of butterfat and whey products. The skim-solids import forecast was raised based on expected higher imports of milk protein products and a number of other dairy products. The skim-solids basis export forecast was lowered on lower shipments of whey products, lactose, and nonfat dry milk (NDM).

The annual product price forecast for cheese was raised from last month on higher current prices and expected stronger demand. Butter, NDM and whey prices were reduced on current prices and expected weaker demand.

The Class III milk price projection was raised on the higher cheese price forecast. Department bean counters now expect a 2019 average of $15.10 to $15.60 per hundredweight, up 15 cents from last month's projection, and compares to $14.61 in 2018 and $16.17 in 2017.

The Class IV average was reduced on lower NDM and butter price forecasts. It is projected to range $15.75 to $16.35, down a dime on the high end from last month's estimate and compares to $14.23 in 2018 and $15.16 in 2017.

Cash block Cheddar cheese closed April 12 at $1.6450 per pound, down 1½ cents on the week but 4 cents above a year ago. The barrels finished at $1.6175, 4¼ cents higher on the week, highest since Sept. 4, 2018 and 15¾ cents above a year ago. Ten cars of block were sold on the week and 39 of barrel.

Dairy Market News reports that spot milk price averages were steeper on average. Some cheese makers sold extra milk back to the market, but there is plenty of it for cheese and some producers are running seven-day weeks. Demand continues to increase steadily for most cheese producers, while others relay April and May orders are booming. Cheese inventories in the region are generally in "a good place," while nationally they remain a concern.

Cheese Moves Higher

Western cheese makers report demand as a "mixed bag." While some say retail and food service accounts are taking a little more cheese than normal, others say demand the last few weeks has been slow. The current market tone is "a bit uninspiring," says DMN. Production is generally active and steady across the region, but some processors are trying to hold back to control inventories which remain heavy.

Jerry Dryer, analyst and consultant with JDG Consulting, says cheese prices popped higher earlier than he expected this spring, although he warned the price could slip due to the spring flush, which USDA says is occurring in parts of the West and Southern Central regions.

Dryer upped his second quarter Class III price forecast by $1 per hundredweight from where it was a month ago, he said, and added 35 cents to his third quarter projection. But he explains, "It's not so much a result of sales because we still face the tariffs on exports and domestic sales are nothing to write home about, but the supply is tightening up. The lower prices are having their impact."

He projects the cheese price to be around $1.75 per pound by October and will average about $1.61 for the year, up from $1.53 last year. That puts the Class III price average at around $16, versus the 2018 average of $14.61, he said.

The butter market is in balance right now, according to Dryer, but "could head sharply higher any minute." He sees potential for "some major strength" in butter as the supply draws lower, but he is not so confident on NDM. He sees it languishing for the rest of the year.

When asked about the whey market being heavily influenced by the health issue in China's hog industry, he agreed and said he's not very optimistic on the whey market and whey prices this year. But "cheese will drive that Class III price for us."

CME butter saw a Friday close at $2.2575 per pound, down 1¼ cents on the week and 3 cents below a year ago, on just one sale for the week.

DMN says butter makers are noticing the recent uptrends on cream prices and, with rising cream multiples, some churners are not as full as they prefer. A number of plant managers are looking for cream within the region and expect it to stay pretty tight until the spring holidays. Others expect cream to remain slightly more available for longer this year as schools are running later due to the accumulated snow days this winter. Butter demand has met expectations ahead of the spring holidays and producers suggest the consistency of butter sales has mirrored the butter markets. Regional producers continue to see strong export demand. In general, butter inventories are in good balance, while production has begun to steady following the busy winter season.

Grade A nonfat dry milk held all week at 98¾ cents per pound, unchanged on the week but 25½ cents above a year ago, with 11 sales reported on the week.

Dry whey was up 1¼ cents on the week, closing last Friday at 35¾ cents per pound, 5¼ cents above a year ago, with 20 cars sold on the week at the CME.

Checking commercial disappearance, HighGround Dairy's Lucas Fuess reports that USDA's latest data shows January butter, whey protein concentrate and lactose were the only products that topped last year's levels.

"Total cheese disappearance started the year on a negative note," reports Fuess, "with domestic disappearance down 2.9 percent year over year overcoming stronger exports to pull total disappearance down 2.6 percent. Domestic butter disappearance surged higher in January for the strongest year over year climb since August 2015 and the strongest January butter domestic disappearance on record."

"January NDM/skim milk powder disappearance remained lower versus the prior year and for the fourth consecutive month, pulled down at the start of this year by both domestic and export disappearance. Dry whey disappearance was sharply lower," he said, "pulled down by both weak domestic and export demand."

China Devastated by Disease

A lot of eyes are on China's African Swine Fever (ASF) outbreak, which is ravaging their hog industry. FC Stone estimates that China buys close to 880 million pounds of whey permeate per year to feed their massive herd. It adds that China equates for over 50 percent of hog production in the world and estimates their feed demand is down conservatively by 30 percent.

"The evidence is clear if you look at the sharply negative soybean crushing margins in China," reasons FC Stone in its April 8 Early Morning Update. "In one of the most intensive hog production regions in China, Shandong, our colleagues estimate that feed demand is down by a shocking 50 percent."

"It's short-sighted to think that there's only been one case of ASF made public by Chinese officials in the Shandong region," FC Stone concludes.

Meanwhile, the April 8 Daily Dairy Report updated details of New Zealand's efforts to eradicate Mycoplasma bovis, the first effort of its kind in the world. The DDR says the disease does not infect humans and poses no food safety risk but affects animal welfare and reduces productivity.

The DDR says New Zealand initiated its eradication effort in July 2017 and, as of the week of April 1, testing identified 161 farms with animals positive for the bacterium, including 75 with dairy cows, 62 with beef animals and 24 others. The DDR said, "The New Zealand Biosecurity Act of 1993 calls for these farms to be completely depopulated of cattle, cleaned and disinfected. Currently, 103 farms have completed the eradication process and 58 are still actively engaged. Over 311,000 tests have been completed and over 91,000 cattle have been culled."

New Tariffs Possible

The big news in trade last week was President Trump threatening a new round of tariffs on Europe and the EU. FC Stone points out that 76 percent of U.S. cheese imports last year came from Europe, about 293 million pounds. "The proposed tariffs would actually impact about 72 percent of cheese imports from Europe, so that nets out to increased tariffs on about 55 percent of U.S. total imports," said FC Stone.

"Butter seems to be a bit more straightforward, as all of U.S. imports from the EU would be hit by tariffs and the EU accounted for 88 percent of total butter imports last year, or about 72 million pounds. To give us some perspective, butter imports from the EU last year accounted for nearly 4 percent of U.S. consumption while the impacted cheese imports were only 1.7 percent of total cheese consumption. While it may be too early to gauge the impact, your charcuterie trays and imported wines will likely get a bit more expensive," warns FC Stone.

One more bit of news this week, the USDA announced another bid for 2.7 million pounds of processed American cheese as part of the administration's "trade mitigation" program. The bids will be due April 24 and the delivery period will be from July 1 to Sept. 30, 2019."

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