Dairy Prices Move Higher; Margins Improve Due to Lower Feed Costs
Published: Friday, May 17, 2019
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
Cash dairy prices saw some ups and downs the first full week of May but closed mostly higher. Block cheese climbed to $1.7075 per pound last Tuesday, highest since March 28 but closed at $1.68, up a half-cent on the week and 4¾ cents above a year ago. The barrels hit $1.74 last Tuesday, highest since Nov. 10, 2017 but finished the week at $1.71, up 4¾ cents and 9 cents above a year ago. Eighteen cars of block traded hands at the CME and 13 of barrel.
Cheese demand reports remain mixed in the Central U.S., according to Dairy Market News. Some pizza cheese producers report that sales are slower than expected but are ahead of last year. Spot milk prices remained steady as milk inventories have yet to meet flush levels of previous years. DMN says the average spot milk price was $2.50 under one year ago and $4.50 under two years ago. Central cheese inventories are generally under control while national stocks remain long.
Western cheese output continues to run at or near capacity as there's plenty of milk available. Domestic demand is solid, but prices in a few trading venues are making it challenging to compete in some international markets. Without export assistance or price concessions, U.S. cheese sellers face headwinds to make large sales overseas.
Cash butter closed last Friday at $2.34 per pound, up 6¾ cents higher on the week and a half-cent above a year ago, with five sales reported.
The flow of cream to Central churns continued to slow last week. Many are "micro-fixing" (thawing frozen blocks into consumer ready blocks or sticks). DMN says, "There are a few producers willing to pay the increased price for cream in order to catch up on building stocks after some longer-than-expected plant closures during the prime churning season, mainly due to weather-related closures." Buying interest is steady to slower while meeting most expectations and butter market tones remain steady. Some contacts are bullish, bracing for a market spike in the fall, akin to 2014 and 2015. Others suggest recent history would show us butter markets are hesitant to dramatically shift in any direction.
Cream availability in the West is a bit tighter compared to last year. Butter processors may be finding the loads of cream needed for day-to-day churning but they are not getting them at discounted prices. Butter output is steady and sales to the retail sector and restaurants have maintained their solidity of the past few weeks but demand is not enough to absorb all the output.
Grade A nonfat dry milk closed last Friday $1.0675 per pound, after hitting $1.0725 on last Thursday, highest CME price since Oct. 5, 2015. That's 21 ¾ cents above a year ago, with zero sales for the week.
Spot dry whey was unchanged all week, holding at 34¾ cents per pound for seven consecutive sessions, 2¼ cents above a year ago, with no sales reported.
In other export news, HighGround Dairy reports that cheese exports surged to an all-time high in March, driven by continued strength from South Korea. The U.S. shipped 18.7 million pounds of cheese to South Korea in the month, up 39 percent from 2018 and moved the country to the top export destination for U.S. cheese for the first time since March 2015. Product moving to Mexico fell 17 percent, to 16 million pounds, lower versus February volumes but stronger versus January, according to HGD.
Nonfat dry milk exports were down from a year ago but still marked the strongest monthly exports since October. Shipments to Mexico totaled 56.5 million pounds, down 19 percent versus prior year.
This was the first year-over-year decline this year after shipments to Mexico were stronger in both January and February. Exports to the remainder of the top five destination countries were all stronger.
Dry whey exports continued lower into March but still marked the strongest monthly export volumes since November. China remained the top destination for U.S. whey, at 12.2 million pounds, down 34 percent from 2018, according to HGD.
Improving Margins
Dairy margins improved over the second half of April on strength in milk prices and renewed weakness in feed costs, according to the latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC.
The MW reported, "Deferred margins are now approaching the 80th percentile of the previous decade, offering attractive opportunities for dairies to secure forward profitability. Strength in milk is being driven on the supply side, with USDA's latest monthly production report showing the first year-over-year decline for March since 2013."
"A combination of harsh winter weather and a continued decline in the milking herd sent U.S. milk output down .4 percent from 2018 to 19.1 billion pounds. The U.S. milking herd shrunk 10,000 head to 9.344 million, down 86,000 cows from last year. Milking productivity continued to improve, with output per cow up .5 percent from last year to 2,024 pounds per cow, but the improvement was not sufficient to offset the decline in the total milking herd."
"Heifer slaughter in March totaled 797,300 head, up 10.7 percent from last year on a daily average basis with total first quarter slaughter up 9.5 percent from 2018. The USDA Cold Storage report was also slightly supportive for milk," the MW states.
"Corn and soybean meal continue to decline with negative sentiment plaguing those markets, despite a slow start to the planting season and widespread rain across the U.S. Corn Belt," the MW reports. "Hay prices remain high, however, due to tight inventory and harsh winter conditions. The Dec. 1 hay stocks were at the lowest level since 2012," the MW concluded.
Meanwhile, the latest World Agricultural Supply and Demand Estimates report issued last Friday morning reduced the USDA's projected milk production estimate for the sixth month in a row, blaming declining milk cow inventories and slow growth in milk per cow. Milk price estimates were raised.
2019 output is now projected at 218.7 billion pounds, down 800 million pounds from last month's estimate, but would still be up 1.1 billion pounds, or .5 percent, from 2018.
The report provided the first preview of what is expected for 2020, projecting milk output to hit 222.7 billion pounds, which would be up 4 billion pounds from 2019.
Dairy herds are expected to begin to expand as producers respond to higher milk prices and lower feed costs, according to the USDA. Milk per cow is expected to continue increasing, plus the forecast reflects the one extra day due to leap year.
In other crop news, President Trump charged that China "broke the deal," sending most commodity markets, including grains, lower last Wednesday and Thursday. U.S.-Chinese trade talks broke down, and increased tariffs went into effect last Friday. FC Stone warned, "It is getting to be late in the grain marketing year for Chinese purchases to save the day."
"Traders aren't panicking about the weather yet," says FC Stone. "With plenty of rain and no signs of drought, the next two weeks will be critical for U.S. planting. U.S. farmers can plant quite a few acres when the weather cooperates. Many market participants are comparing the current year to 2013, a year that started very weak and warmed up rapidly. Another 'analog year' is 1993, a year of record flooding in the Mississippi basin. Many flood gauges along the Mississippi have exceeded the records set in 1993. With all this said, 'rain makes grain,' once it's planted," said FC Stone.
As I have written before, the U.S. dry whey price is greatly influenced by the current African Swine Fever epidemic in China. Matt Gould, analyst and editor of the Dairy and Food Market Analyst newsletter, gave us some perspective on that in the May 13 Dairy Radio Now broadcast.
ASF is terminal to pigs, Gould said, and much of China's pigs live on small farms, where it's very difficult to be bio-secure and thus to contain the disease. The clincher is that China has almost as many pigs in the country than the U.S. has people. That requires a lot of feedstuffs and, with indications that a third or more of China's pig population will have to be eliminated, that's a lot of feed not being consumed, he said. "Imagine losing a third of the U.S. population."
The other wild card is the fact that the rest of Southeast Asia tends to be a heavy pork consuming region. "We don't really know where the spread in this disease stops, and the farms in those regions aren't really set up to be bio-secure so for the foreseeable future it will continue to spread," he warned.
On a brighter note, Gould talked about the fact that "we have high milk prices after four years of subdued prices." But he cautioned that the rally is being driven by a decline in supply of milk, less so than a surge in demand.
He seeing prices topping out in the third or fourth quarter, with the highest levels we have seen since 2014, which were at an all-time record high. He doesn't see us beating those prices but projects something around $18 or higher.
In politics, a group of 67 food and agriculture associations and companies have called on U.S. lawmakers to ratify the U.S.-Mexico-Canada Agreement. A press release from the International Dairy Foods Assn. stated that groups and companies from across the food and agriculture spectrum underscored in a letter that "the new agreement includes important improvements that will enable food and agriculture to trade more fairly, and to expand exports of American ag products to Canada and Mexico, respectively."
The letter stated that a recent analysis of the USMCA by the International Trade Commission found the deal to be "a boon for the U.S. economy, raising U.S. GDP by $68.2 billion and pumping an additional $2.2 billion, or 1.1 percent, into the U.S. economy through increases in agricultural and food exports." "The food and agriculture industry welcomed the opportunity to modernize the North American Free Trade Agreement," according to the letter.
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