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Higher Milk, Dairy Product Prices Could Stick Around for a While

Published: Friday, January 21, 2022

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

After lowering estimates for 2021 and 2022 milk production for six consecutive months, the Agriculture Department left its latest projection unchanged in the Jan. 12 World Agricultural Supply and Demand Estimates (WASDE) report.

2021 production and marketings remain at 226.2 and 225.2 billion pounds, respectively. If realized, 2021 production would be up 3 billion pounds, or 1.3 percent, from 2020.

2022 production and marketings remain at 227.7 and 226.6 billion pounds, respectively. If realized, 2022 production would be up 1.5 billion pounds, or .7 percent, from 2021.

Cheese, butter, nonfat dry milk and whey price forecasts were raised from last month on firm domestic demand and tight supplies. The 2022 cheese price average was projected at $1.8750 per pound, up from the 2021 average of $1.6755. Butter is expected to average $2.30 per pound, up from the 2021 average of $1.7325.

Class III and Class IV milk prices were raised on the higher product prices. Look for a 2022 Class III average at $19.65, up $1.50 from last month's estimate, and compares to $17.08 in 2021 and $18.16 in 2020. The Class IV average was projected at $20.90, also up $1.90 from last month's estimate, and compares to $16.09 in 2021 and $13.49 in 2020.

This month's corn outlook is for higher production, greater food, seed and industrial use (FSI), lower exports and larger ending stocks. Corn production was estimated at 15.115 billion bushels, up 53 million on a .3-million acre increase in harvested area. Total corn use was unchanged at 14.835 billion. Exports were lowered 75 million bushels to 2.425 billion, reflecting expectations of increased competition from other exporters. FSI use was raised 80 million bushels. Corn used for ethanol was raised 75 million bushels to 5.325 billion. Corn stocks were raised 47 million bushels and the season-average corn price received by producers was unchanged at $5.45 per bushel.

Soybean production was estimated at 4.44 billion bushels, up 10 million. Harvested area was estimated at 86.3 million acres, down slightly from the previous report. Yield was estimated at 51.4 bushels per acre, up .2 bushels. Soybean supplies were raised 11 million bushels on higher production and slightly higher beginning stocks. Ending stocks were projected at 350 million. The U.S. season-average soybean price was forecast at $12.60 per bushel, up 50 cents. Soybean meal was projected at $375 per short ton, up $45. The global soybean outlook includes lower production, crush, exports and stocks. Foreign soybean production was lowered 9.5 million tons on reduced crops for Brazil, Argentina and Paraguay, according to the WASDE.

Meanwhile, in the week ending Jan. 1, 52,400 dairy cows were sent to slaughter, up 4,900 from the previous week and 300 head, or .6 percent, above a year ago. The four-week average was up 1.08 percent from a year ago.

Dairy prices were mixed the second week of 2022. The Cheddar blocks climbed to $2.0525 per pound last Wednesday, highest since Nov. 12, 2020, but dropped from there to a Friday close at $1.92, down 7.5 cents on the week and 9 cents above a year ago.

The barrels finished at $1.96, 9.50 cents higher on the week, fourth week of gain and highest since Nov. 11, 2020, 38.75 cents above a year ago and 4 cents above the blocks. There were four sales of block on the week and seven of barrel.

Spot milk availability for cheesemakers varies in the Central region, according to Dairy Market News. Some say milk offers are quiet and there is a general sense of balanced supplies. Still, holiday level discounts were being offered in other parts; in some cases, the discounts were due to neighboring plants being shorthanded. Bottling was also starting to affect milk availability as a growing number of cheesemakers say they were being asked to resell milk into Class I. Reported higher culling rates are being blamed on harsh winter conditions and stronger beef prices, according to DMN, and there are expectations that milk accessibility will begin to decrease. Cheesemakers report mixed demand but markets are strong despite the wide gap between blocks and barrels. High market prices may slow overall demand, warned DMN, but contacts suggest "the short-term picture is being painted with a bullish brush."

Western cheese demand remains steady at retail, food service and internationally. Notable purchasing continues from Asian markets, but it faced continued delays from port congestion. Domestic loads of cheese were delayed due to the ongoing shortage of truck drivers and poor weather. Milk is available in the region but extreme weather was preventing supplies from reaching plants. Cheese output is steady to lower, with some plants reporting continued delays to production supplies and labor shortages causing them to run reduced schedules.

Butter climbed to $2.8425 per pound last Tuesday, highest since Dec. 7, 2015, but the rising star reversed direction last Wednesday and closed last Friday at $2.7250, down 1.75 cents on the week but $1.4350 above a year ago. Twenty-eight sales were reported.

Central butter churning is busy despite COVID-related worker issues, even as cream supplies slowly tighten. Cream prices are slowly edging higher after the seasonal holiday abundance. Bulk butter is tight and end users are paying for it. Retail demand is keeping butter makers busy and market tones are "resolutely bullish," says DMN. International butterfat values are also climbing. Contacts expect market tones will sustain this pressure for longer than just the near term.

Western cream demand picking up. Contacts report that some purchasers in the Midwest were looking to the region for cream. Severe weather and a shortage of truck drivers was causing delays. Demand for butter is strong in both domestic and international markets.

Grade A nonfat dry milk shot up to a Friday finish at $1.8150 per pound, up 10.50 cents on the week, highest since June 25, 2014 and 61.50 cents above a year ago. Thirteen sales transpired on the week. The record CME price high is $2.16 per pound on Dec. 5, 2007.

CME dry whey kept creeping higher and closed last Friday at a new record high 77 cents per pound, up 1.25 cents on the week and 24 cents above a year ago, with three sales reported for the week.

Dairy analyst and editor of the Dairy and Food Market Analyst newsletter, Matt Gould, said in the Jan. 17 "Dairy Radio Now" broadcast that these higher dairy prices will likely be around for a while. He said COVID has kept new plants from being built, so we won't have an increase in supply of cheese or whey products.

He added that feed prices have been high and margins very challenging, so "there is no wall of milk in the dairy universe right now. Milk is tight in the U.S., milk is tight in Europe and in New Zealand, and that's a recipe for high prices."

When asked if the resulting high milk prices will find their way to the farm and not be derailed like what happened in 2020 due to de-pooling and high producer price differentials, Gould answered, "This time around, farmers are definitely going to benefit." While he admitted there is a lag before they show up in the milk check, "the first half of 2022 is going to have pretty solid margins."

Lastly, the latest COVID surge has been particularly disruptive to all kinds of manufacturing plants, according to Gould, with employees calling in sick. Often, entire shifts or a big part of a shift is not able to show up because of outbreaks, with some plants not even able to run due to the lack of employees.

"The silver lining may be that we're going through this surge right now, and it's very challenging," he concluded, "but as we look forward and we get past this surge, hopefully, we have a return to normal."

StoneX Jan. 12 Early Morning Update echoed the sentiment, "The trend for dairy is up. But the takeaway from conversations around dairy products and prices is summed up in one word: chaos. And this isn't just for dairy. Supply chains are chaotic." Store shelves are spotty, some well-stocked while others are not. There are reports of better milk supply in some sheds and milk is starting to be offered under class, but there has reportedly been aggressive dumping of millions of pounds of milk in the Pacific Northwest due to weather, trucking and labor issues.

"There seems to be something new and unforeseen happening," warned StoneX. "This may be more normal than we give it credit for, but it highlights the potential for increased volatility on dairy markets now and in the near future. We've seen increased producer selling activity here to start 2022, but overall farm hedging activity remains on the lighter side. DRP insurance coverage for first quarter is 9.9 percent of U.S. milk supply. Not bad, but producer's coverage was closer to 30 percent of U.S. milk for first quarter 2021. We may have a really high price year for dairy," the update concludes. "But given the news cycle and supply-chain issues, producers ought to continue to be diligent with their hedge plans."

The National Milk Producers Federation concurs with the optimism. NMPF chief economist Peter Vitaliano, in an NMPF podcast, stated, "Dairy prices for 2022 are projected at an eight-year high. With supply adjustments and booming exports across a wide range of products shoring up farmer balance sheets that have struggled with volatility during the pandemic era."

"Not only is the outlook for milk prices the best in eight years, but that's also the case for the individual dairy products," Vitaliano said, crediting tight supplies. "The big question is, with milk prices this good and feed prices not going up as fast as they were last year, how long is that tightness going to continue? And how soon will it be before we see some expansion of milk production again?"

Vitaliano encouraged farmers to sign up for the Dairy Margin Coverage program, which has a deadline of Feb. 18 for 2022 assistance. "The futures markets look very good at the moment," he concluded, "but there are many months to go. The history of dairy farmers second-guessing the markets, even based on the futures, is not very good. And again, given how inexpensive coverage is, our recommendation continues to be you should sign up for the program."

Fluid Milk Sales Down Slightly

Unfortunately, the news isn't quite so rosy for fluid milk sales, although not as bad as it has been. The USDA's latest data shows November sales of packaged fluid products at 3.8 billion pounds, down just .9 percent from November 2020.

Conventional product sales totaled 3.6 billion pounds, down .8 percent from a year ago. Organic products, at 230 million pounds, were down 1.8 percent, and represented 6.1 percent of total sales for the month.

Whole milk sales totaled 1.3 billion pounds, virtually unchanged from a year ago, with year-to-date consumption down 5.7 percent. Whole milk represented 33.1 percent of total milk sales for the 11-month period.

Skim milk sales, at 204 million pounds, were down 8.9 percent from a year ago and down 12.7 percent year-to-date.

Total packaged fluid milk sales for the 11 months amounted to 40.4 billion pounds, down 4.2 percent from 2020. Conventional product sales totaled 37.9 billion pounds, down 4.3 percent. Organic products, at 2.6 billion, were down 2.5 percent, and represented 6.3 percent of total milk sales for the period.

The figures represent consumption in federal milk marketing order areas, which account for approximately 92 percent of total fluid milk sales in the U.S.

In politics, Agriculture Secretary Tom Vilsack announced an adjustment in school meal reimbursements to "help schools continue to serve children healthy and nutritious meals," according to a USDA press release. The move puts an estimated $750 million more into school meal programs across the nation this year, "making sure federal reimbursements keep pace with food and operational costs, while ensuring children continue to receive healthy meals at school."

Last of all. U.S. milk production is mixed between and within regions, according to the USDA's weekly update. Class I demand is increasing as winter breaks come to an end. Spot milk availability is varied. Where available, cheesemakers are acquiring milk at from $4 under class to $1 under.

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