Perdue's Comments Are a Wakeup Call for Smaller Dairy Farms
Published: Friday, October 11, 2019
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
Agriculture Secretary Sonny Purdue kicked off World Dairy Expo in Madison last week, telling dairy farmers they will have to adapt to survive. He said, "It's very difficult in the economy of scale, capital needs, all of the environmental regulations and everything else to survive milking 40, 50, 60 or even 100 cows."
HighGround Dairy's Lucas Fuess reported in the Oct. 7 Dairy Radio Now broadcast that it was difficult to hear that sentiment, but it is reality and "a wakeup call to make sure farmers are doing everything they can to keep costs down and continue to be competitive."
He said the sentiment was better at Expo this year, due to the rise in milk prices, and says HighGround has a good outlook the next few months which "hopefully will save some of the struggling dairies." He said it was interesting to compare the secretary's comments to some of the programs contained in the farm bill, as HighGround believes smaller dairies can benefit greatly from some of them such as the Dairy Revenue Protection and newly named Margin Insurance programs.
Fuess sees continued tariff challenges on the horizon such as the latest battle with the EU and with China, even as trade officials meet Oct. 10 in Washington. "Hopefully some tariff resolution will come soon," he concluded, "and be able to increase U.S. dairy exports, push that milk price a little higher, and stop some of the struggles that these small dairy farms are seeing."
Fuess' EU reference regarded a ruling by the World Trade Organization which allows the U.S. to implement tariffs on $7.5 billion of imports from the EU in response to its subsidies of Airbus. The U.S. trade representative stated that a 10 percent tariff will be levied on European aircraft and 25 percent on agricultural goods including butter and cheese, as well as industrial products and other imports.
The Agriculture Department announced the September federal order Class III benchmark at $18.31 per hundredweight, up 71 cents from August, $2.22 above September 2018, and the highest it has been since November 2014. The nine-month Class III average stands at $16.11, up from $14.62 at this time a year ago and compares to $16.12 in 2017.
Last Friday morning, Class III futures portended an October price at $18.32; November, $18.01; and December at $17.37, which would result in a 2019 average of $16.56, up from $14.61 in 2018 and $16.17 in 2017. The peak in 2020 was $17.47 in September.
The September Class IV price is $16.35, down 39 cents from August and the lowest since May, but is $1.54 above a year ago. Its 2019 average stands at $16.21, up from $13.95 a year ago and $15.51 in 2017.
You'll recall that preliminary data showed August 50-state milk output at 18.3 billion pounds, up just .2 percent from August 2018. The August Dairy Products report shows that more milk went to the cheese vat. Total cheese output hit 1.11 billion pounds, up 1.6 percent from July and 2.2 percent above August 2018. Year-to-date output is at 8.68 billion pounds, up just .9 percent from a year ago.
Wisconsin produced 290.5 million pounds of the total, up 2.9 percent percent from July and 2 percent above a year ago. California output fell to 199.6 million pounds, down 5.2 percent from July and 5.7 percent below a year ago. Idaho contributed 88.1 million pounds, up 1.1 percent from July and 14.8 percent above a year ago. Minnesota output slipped to 59.8 million pounds, down 1.1 percent from July and 2.3 percent below a year ago. New Mexico, at 90.5 million, was up 18 percent from July and 20.2 percent above a year ago.
After dropping 9½ cents the previous week, the CME Cheddar blocks climbed back to $2.02 per pound last Thursday but closed the first Friday of October at $1.9925, 3¾ cents higher on the week and 34¼ cents above a year ago. The barrels finished at $1.79, up 13½ cents and 42¼ cents above a year ago. The spread fell to 20¼ cents. Eleven cars of block and 23 of barrel were sold.
Milk offers are few and far between in the Midwest, according to Dairy Market News, and spot milk prices ranged from class to $1.50 over. Cheese demand reports were more positive and some expect demand to remain strong the rest of the year and into 2020. Cheese production is slower due to scanter milk supplies.
Western contacts report that current price trends are taking U.S. cheese out of the loop when it comes to international sales. Others suggest that export demand has improved. Block cheese inventories were reported as well-adjusted, whereas barrel cheese supplies are substantial.
Butter closed the week at $2.1850 per pound, up 3¾ cents but 10½ cents below a year ago, with 15 trades occurring.
Central butter manufacturing is steady, says DMN. Cream remains available and in a comfortable price range for butter plants. Inventories are reportedly in balance and will meet the increase in ordering expected near term. But, contacts do not expect cream to remain at current availability for long. Cream cheese production is expected to dip into the cream pool. Butter markets are steady, edging on bearish, but some contacts foresee continued price drops. Recent storage and market reports did not dampen the market tone as much as some expected, according to DMN.
Western contacts suggest the butter market has a "downside feel." "Even now, when market activity is usually at its annual peak, demand is less than hoped for," said DMN. Buyers have filled some of their required purchases, according to contacts, but can wait for deals to finish off fourth quarter needs. Cream is readily available and butter inventories, while being drawn down seasonally, are larger than preferred.
FC Stone warned in its Oct. 1 Early Morning Update, "The likelihood of seeing sub-$2 butter prices by the end of fourth quarter is growing. Strong production and strong imports have resulted in larger than expected butter stocks that look like they are going to drag CME prices lower."
Spot Grade A nonfat dry milk closed last Friday at $1.1450 per pound, highest CME price since March 2, 2015, up 3½ cents on the week and 28½ cents above a year ago, with 11 cars exchanging hands for the week.
Weaker butter prices are being offset by firming nonfat dry milk prices, according to FC Stone, which are leaving Class IV prices in a holding pattern for now. "U.S. powder continues to find underpinning support principally in global demand that seems to be improving by the week lately."
CME dry whey closed last Friday at 32¾ cents per pound, down 2 cents and 23½ cents below a year ago, with a whopping 80 cars sold on the week.
The whey market is heavily influenced by African swine fever, which has devastated the world's largest hog herd, namely China. The Daily Dairy Report's Sarina Sharp wrote in the Sept. 27 Milk Producers Council newsletter that "amidst sky-high pork prices producers are surely looking to boost production. They are investing in piglet health, which would likely boost whey purchases."
She reports, "Chinese whey imports were just shy of 100 million pounds in August, highest volume since January and just 3.6 percent less than in August 2018. However, there are still reasons to be concerned about global demand for feed whey. The Chinese pig herd is considerably smaller than it was a year ago, and the disease is spreading quickly through South Korea, Vietnam and the rest of Southeast Asia."
Back on the home front, the USDA will do another round of "trade mitigation purchases" and has issued a timeline for continued purchases into 2020. Volumes were not listed, says FC Stone, but "they are talking about buying print butter, string cheese, 1- and 2-pound Cheddar chunks, instant nonfat dry milk and gallons and half-gallons of milk. Since it is all consumer type package sizes, we assume all of this would be going to food shelves and pantries."
Finances on U.S. dairy farms continue to improve. A higher All-Milk price and lower feed prices nudged the August milk feed price ratio higher for the second month in a row. The latest Ag Prices report put the ratio at 2.26, up from 2.16 in July and compares to 2.06 in August 2018.
The U.S. All-Milk price averaged $18.90 per hundredweight, up 20 cents from July and $2.80 above August 2018. California's All-Milk price was $18.70, up a dime from July and $2.85 above a year ago. Wisconsin's, at $19.10, was up 30 cents from July and $2.80 above a year ago.
The national average corn price averaged $3.93 per bushel, down 23 cents from July but 57 cents per bushel higher than August 2018. Soybeans averaged $8.22 per bushel, down 16 cents from July and 37 cents below a year ago. Alfalfa hay averaged $179 per ton, down $4 from July but $2 per ton above a year ago.
Looking at the cow side of the ledger; the August cull price for beef and dairy combined averaged $68.30 per hundredweight, up $1.30 from July, $5.30 above August 2018, but $3.30 below the 2011 base average of $71.60 per hundredweight.
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