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Class 3 Milk Future Hit Five-Year High and Could Reach $20

by Lee Mielke

Published: Friday, November 8, 2019

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

The October Federal order Class III benchmark milk price hit a five-year high last week at $18.72 per hundredweight, up 41 cents from September, $3.19 above October 2018, and the highest Class III since November 2014. It equates to about $1.61 per gallon, up from $1.57 in September and $1.34 a year ago.

Last Friday morning, Class III futures portended a November price at $20.18 before heading to $19.60 in December. The 2020 peak was $18.07 in January. The 2019 Class III average stands at $16.37, up from $14.72 at this time a year ago and $16.18 in 2017.

The October Class IV price is $16.39, up 4 cents from September and $1.38 above a year ago. The 2019 average stands at $16.23, up from $14.06 a year ago and $15.44 in 2017.

Most cash dairy prices ended October strong. Block Cheddar climbed to $2.1750 per pound the day after Halloween but closed last Friday at $2.1550, up 3.25 cents on the week, after gaining 15.5 cents the previous week, and is 69.75 cents above a year ago.

The Cheddar barrels closed at $2.3250, up 7.5 cents on the week on unfilled bids, after pole vaulting 25 cents the previous week, are 98.5 cents above a year ago, and the highest they have been since Sept. 25, 2014. They're also an inverted 17 cents above the blocks. Twenty-four cars of block traded hands on the week and 69 on the month, up from 63 in September. No barrels were sold last week, but 66 cars sold on the month, down from 80 in September.

Speaking of Halloween, the Oct. 31 Daily Dairy Report states that pizza is a key driver in cheese consumption and a study conducted by Under Armor's MyFitnessPal indicates that Halloween may surpass Super Bowl as the biggest pizza consumption day of the year. Who would have thought?

Central cheesemakers continue to report steady, somewhat tight milk supplies, according to Dairy Market News. Spot milk markets were quiet early in the week, as prices continue to fall in the $1-over class area. Cheese production is still slightly slower than this time in recent years. Cheese demand is good for short term needs. Barrel makers continue to report mostly bullish demand and some process cheese manufacturers say they are oversold week to week. Cheese market tones are "bullish," says DMN, but cheesemakers are concerned about how bullish. They say $2+ cheese is "creating a short-term or necessity-based purchasing environment. Buyers are not looking for anything longer term."

The CME barrel pricing topping the blocks was a surprise to many, according to DMN, and contacts credit a tightness of barrels. Increased governmental cheese purchases seem to be helping that trend. Demands for the holiday are surfacing "bit by bit," says DMN, but domestic sales out west were close to the previous week's levels. Export sales have improved slightly. Inventory is sufficient and cheese output is active, prompted by a stable to increasing milk supply.

CME butter closed last Friday at $2.08 per pound, up 2 cents on the week but 22 cents below a year ago. Twenty-nine cars traded hands on the week, 115 on the month, up from 102 in September.

FC Stone reported in its Oct. 28 Early Morning Update that "Eurostat keeps revising up European Union butter production data. Each state submits data on their own schedule, so data drips in, along with revisions to historical data, but presently the data looks like EU butter stocks will be up 20 percent by year end."

DMN says there was concern that cream availability for churning could dwindle as Class II and Class III producers took more cream for holiday-related items but butter makers say that was not the case this week. Bulk butter supplies are generally available and market tones are "maintaining a steadiness that market participants are accustomed to." Some analysts expect to see a sub-$2 price point prior to seeing $2.25 again. Others expect continued steadiness, explaining that with Thanksgiving falling later this year, Nov. 28, it will assist the market later into the season.

Grade A nonfat dry milk saw last Friday's finish at $1.1825 per pound, 3 cents higher on the week, highest since Feb. 18, 2015, and 28.25 cents above a year ago. Sixteen cars sold on the week, with 60 for the month, up from 49 in September.

CME dry whey fell to 26.75 cents per pound last Tuesday, lowest since March 13, 2018, but it closed last Friday at 28.25 cents, unchanged on the week but 16.25 cents below a year ago. Product continues to make its way to Chicago, with 48 loads traded this week and 305 on the month, up from just 50 in September.

Chinese milk equivalent imports for September were very close to forecast, according to FC Stone, up 1.7 percent from last year, but FC Stone predicted "the growth rate for October should pick up quite a bit (into the 5-10 percent range). Food-type imports are still doing pretty good, but feed-type items, especially lactose, are holding back total milk equivalent imports."

"Milk equivalent imports aren't growing like they were in 2013-14. First quarter 2014 total milk equivalent imports were up 43 percent with feed up 14 percent and food-type products up 52 percent (on top of 25 percent growth in first quarter 2013," said FC Stone.

Cheese imports were down 58.7 percent from August and down 2.9 percent from September 2018. Butter imports were down 56.3 percent from August and 7.4 percent below a year ago. Combined whole milk and skim milk powder imports were down 25.4 percent from August but were up 25 percent from a year ago. Whey imports were off 9.7 percent from August and 12.6 percent below a year ago.

Whey purchases have been impacted by the African Swine Fever, a highly contagious disease that is spreading through Southeast Asian and is now costing the Philippine hog industry nearly $20 million per month, according to Reuters.

The Daily Dairy Report, however, says the U.S.-China trade dispute likely has more to do with the smaller figure. The DDR stated, "The United States was China's largest whey trading partner in September, accounting for 28 percent of whey imports, matching November 2018 as the lowest share since September 2007. European countries benefited from lower U.S. imports, with volumes increasing 76 percent over the previous year, suggesting that smaller year-over-year volumes from the United States are related more to the trade dispute than ASF."

President Trump and China's Xi Jinping were to meet at the November Asia-Pacific Economic Cooperation meeting in Chile, but it was canceled due to unrest there. HighGround Dairy's Lucas Fuess reported in the Nov. 4 "Dairy Radio Now" broadcast that Xi reportedly invited Trump to meet in Macau, China.

Fuess says there is still hope that Phase 1 of the trade agreement between the U.S. and China can be implemented and that agricultural purchases, including dairy products, will be made by the Chinese. China has made several promises of increased agricultural purchases, primarily corn and soybeans, says Fuess, but HighGround hopes they will include dairy products.

"There is nothing yet in writing," Fuess cautioned, and "China continues to hesitate to commit to exactly how many agricultural products they will purchase." He adds there was a "good sign" in that President Trump has held off imposing additional tariffs on Chinese imports, as he had previously threatened to do.

Fuess also reported on Japan's September dairy imports, which included record levels of cheese due to Japan's declining domestic dairy production. He said that a lot of Japan's dairy imports are from the U.S. However, we continue to compete with Europe and New Zealand. "If the price is right and the U.S. can compete, we can ship product away from our shores and fulfill the needs of foreign countries and hopefully have a good impact on our U.S. domestic prices."

Back home, a higher All-Milk price pulled the September milk feed price ratio higher for the third month in a row. The USDA's latest "Ag Prices" report put the ratio at 2.33, up from 2.26 in August and compares to 2.13 in September 2018.

The index is based on the current milk price in relationship to feed prices for a dairy ration consisting of 51 percent corn, 8 percent soybeans and 41 percent alfalfa hay. In other words, one pound of milk today purchases 2.33 pounds of dairy feed containing that blend.

The U.S. All-Milk price averaged $19.30 per hundredweight, up 40 cents from August and $2.40 above September 2018. California's All-Milk price was $18.60, down a dime from August but $2.04 above a year ago. Wisconsin's, at $19.90, was up 80 cents from August and $2.40 above a year ago.

The national average corn price averaged $3.80 per bushel, down 13 cents from August, after falling 23 cents from July, but is 40 cents per bushel higher than September 2018. Soybeans averaged $8.35 per bushel, up 13 cents from August, after dropping 16 cents from July, and are 43 cents per bushel below a year ago. Alfalfa hay averaged $181 per ton, up $2 from August and $2 per ton above a year ago.

Looking at the cow side of the ledger, the September cull price for beef and dairy combined averaged $65.60 per hundredweight, down $2.70 from August, $4.80 above September 2018, but $6 below the 2011 base average of $71.60 per hundred-weight.

Milk cow replacements averaged $1,310 per head for the quarter in October, up $70 per head from July, and $80 per head above 2018. They averaged $1,400 per head in California, up $100 from July and $200 above a year ago. Wisconsin cows averaged $1,270 per head, up $60 from April and $90 above October 2018.

Meanwhile, FC Stone points out that "weekly slaughter did an about-face for the week ending Oct. 19. After several weeks of running stronger than the prior two years even as Class III milk prices firmed, the latest data showed a 4.8 percent decline in slaughter to below 2018 levels."

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