Grassroots dairy meet with Rep. Thompson, a champion for Ag; Dietary Guidelines, whole milk in schools top the agenda

Congressman G.T. Thompson (center) is flanked on left by Dale Hoffman of Potter County and Sherry Bunting of Lancaster County and on his right by Bernie Morrissey of Berks County, Krista Byler of Crawford County and Nelson Troutman of Berks County. The Grassroots PA Dairy Advisory Committee involved in the 97 Milk effort met with Rep. Thompson this week on dairy issues.

By Sherry Bunting, Farmshine, October 30, 2020

BELLEFONTE, Pa. — From the Dietary Guidelines and whole milk choice in schools to dairy checkoff and milk pricing formula concerns, five members of the Grassroots PA Dairy Advisory Committee involved in the 97 Milk effort from across northwestern, northern tier and southeast Pennsylvania met with U.S. Congressman Glenn “G.T.” Thompson (R-15th) in Bellefonte, Pa. this week to talk about dairy.

Rep. Thompson helped lead the writing of a letter signed by 53 members of the U.S. House, including Ag Committee Chairman Collin Peterson (D-Minn.) and Ranking Member Mike Conaway (R-Texas) to Secretary of Agriculture Sonny Perdue asking for a delay on the decision about final Dietary Guidelines for Americans (DGAs) for 2020-25 until all of the science on saturated fat is considered.

Despite the bipartisan letter, Thompson indicated that USDA and Health and Human Services (HHS) will move ahead to finalize the guidelines by the end of the year.

Thompson shared his thoughts about the disconnect between the legislative branch and a bureaucratically appointed DGA Committee in formulating the DGAs which have so much impact on children and Pennsylvania’s rural economy.

With the election next week in the balance, Thompson said he is looking at introducing language that would give the legislative branch some role in advise and consent with regard to the DGAs. He also praised his colleagues from Pennsylvania as many have cosponsored the Whole Milk for Healthy Kids Act and the Give Milk Act. These bills would allow whole milk as an option at school and in the WIC program.

Under the current House leadership, the bill on school milk is not moving as it has not been taken up by the chair of the Committee on Education and Labor.

“As you know, our office made recommendations for members of the DGA Committee, but that didn’t happen,” said Thompson. “It’s hard to believe that the modern-day science is being ignored on this issue of whole milk. We need checks and balances, not only to serve the needs of children in school, to give them this choice, but also because of the damage these rules do to our rural economy.”

It goes without saying that if the Republicans are able to gain a majority in the House, there would be a better pathway to moving on some of these issues surrounding the way whole milk (and even 2% milk for that matter) are banned from school choices while other less nutritional beverages are offered unchecked. With Democrats in the majority for the past three years, there has been no movement on the bills.

Grassroots PA Dairy Advisory Committee member Krista Byler of Spartansburg, Crawford County, reported to the Congressman that while the beverages offered ala carte at school are calorie controlled per serving, there are no limits on how many of these beverages a student can purchase. At the middle and high school level, sports drinks, diet tea coolers, diet soda, and energy drinks are all allowed.

“But students can’t purchase even one serving of whole milk,” she said. “They simply aren’t allowed.”

“We need to get back to where milk is not tied to the school meal calculation and let it stand alone, and give students the choice,” said Thompson.

Byler serves as head chef and foodservice director for Union City School District, and her husband Gabe operates a 125-cow dairy farm with his father and brother, along with beef cattle and grain crops.

She explained that schools are afraid to move outside of the USDA edicts based on the Dietary Guidelines because of financial repercussions, and it’s difficult to get others to see the issue because so many people are generally unaware that children are limited to only fat-free and 1% low-fat milk options at school.

Five members of the Grassroots PA Dairy Advisory Committee from around the state talked about dairy issues with Congressman Thomspon, especially the Dietary Guidelines and getting whole milk choice in schools.

The group discussed ideas for how to obtain waivers from USDA to do a statewide trial where schools could simply offer all fat levels of milk and collect the data. One such trial, done quietly in Pennsylvania during the 2019-20 school year, revealed that when students at the middle and high school level were given the choice, they chose whole milk 3 to 1 over low-fat. At the same time total milk consumption rose by 65%, and the volume of milk discarded daily by students declined by 95%.

“That’s huge,” said Byler, a constituent of the Congressman. “We don’t need to reinvent a new ‘kids milk,’ we already have one that students will choose if given the opportunity.”

Thompson agreed, stating that, “Now is the time to look at something like this because what have families been turning to in this pandemic? Whole milk,” he said.

This is supported by the most recent USDA data through June showing that both whole milk and 2% milk sales made big gains in June as supply chains worked through the early Covid issues – pushing total fluid milk sales up 2.2% over year ago year-to-date January through June with whole and 2% unflavored white milk together accounting for more than 70% of all fluid milk sales categories, and whole milk alone being the largest selling category.

“Whole milk is what families are seeking when the choice is up to them,” said Thompson, indicating that while consumers are seeing the science on whole milk, the DGA committee is not.

“All of the doctors interviewed on news programs during this pandemic are talking about Vitamin D as boosting the immune system,” said Bernie Morrissey of the Grassroots PA Dairy Advisory Committee.

Thompson observed that with Vitamin D and other nutrients being fat soluble, the DGAs are missing the boat.

Morrissey and Troutman are working with businesses and organizations buying and distributing “Vote Whole Milk School Lunch Choice, Citizens for Immune Boosting Nutrition – 97milk.com” yard signs that are proliferating across the countryside. A link at the 97 Milk website lets citizens know how to get involved, and a second link provides information to get involved in delaying the 2020-25 Dietary Guidelines until all the science is considered on saturated fat.

Concerns about the transparency and accountability of the dairy checkoff program were also discussed, and Thompson was receptive to looking at ways to turn this around.

The Grassroots PA Dairy Advisory Committee suggested ending the influence of importers by ending the import checkoff of 7.5 cents per hundredweight equivalent. This seemed like a good idea when it was implemented in 2007, but in retrospect has set the globalization direction of the national dairy checkoff’s unified marketing plan and ended the practice of promoting Real Seal, made in the U.S. products.

The committee was also looking at the promotion order asking the Secretary of Agriculture, who can amend the order at any time, or to work legislatively to clarify producer rights under the law in where their ‘local’ dime portion of the checkoff is assigned for education and promotion.

Nelson Troutman, a dairy farmer in Richland, Berks County, who started the Drink Whole Milk 97% Fat Free ‘baleboards’ noted that the corn and soybean growers have periodic review of their checkoff programs, and asked if there is a way for dairy farmers paying the mandatory checkoff to have more say on whether it should continue, or more transparency to see all of the expenditures and the plans submitted by DMI to USDA.

The Committee also suggested evaluating the way the boards are formed and even noted that the language of the order suggests the Secretary can call for a referendum even without a petition by 10% of the producers and importers. 

They noted that fresh fluid milk and other fresh dairy products are a critical market for Pennsylvania producers, but the emphasis of the industry appears to be moving in a different direction. Education, promotion and research are important, but the current direction of the national drivers is in question.  

Dale Hoffman of Hoffman Farms, Shinglehouse, Potter County and Troutman both shared the economic conditions in milk pricing and marketing of milk, especially the extreme difference between high protein value and CME cheese markets since June compared with what dairy farmers in the Northeast are actually seeing in their milk checks as negative PPDs subtract the value of their milk components.

In fact, the official Dairy Margin coverage margin for Pennsylvania is running $1 to $3 behind the U.S. average for June through September, when normally Pennsylvania runs with the U.S. average or 20 to 50 cents above it. The divergence makes it hard for producers to use risk management tools and have them function as intended.

Hoffman noted that producers have lost their ability to market their milk competitively in the region – especially in the north and west of the state — and their voice in how milk is priced is lacking. He observed that even Farm Bureau is recognizing this issue with some new recommendations.

Thompson welcomed the idea for a national hearing on milk pricing, especially as the next Farm Bill is not far off, and these issues need to be on the table early.

But first, there’s an election to get past. It is hoped that after November 3, these issues can be looked at. This has certainly been a difficult year on many fronts for all Americans, and the Grassroots PA Dairy Advisory Committee was grateful to speak with the Congressman about their concerns.

Dale and Carol Hoffman of Hoffman Farms took “Vote Whole Milk” yard signs home to Potter County.

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New Cl. I milk price formula puts $403 mil. in processor pockets since May 2019, $436 mil. ‘pulled’ from ‘pools’ in May-Oct 2020 period

By Sherry Bunting, Farmshine, October 9, 2020

BROWNSTOWN, Pa. — The bottom line is the Federal Milk Marketing Orders are not functioning as farm-level pricing can be easily manipulated.

Negative PPDs continue to persist, and all indications are this could be the case through yearend. Several stories in Farmshine since May have covered the Producer Price Differential (PPD) situation and what it means to producer milk checks.

Now, even the American Farm Bureau Federation (AFBF) is on record evaluating the fallout from the new way of calculating the Class I advance base price as implemented May 2019 after passage of the change was made part of the 2018 Farm Bill.

In terms of the money subtracted from Federal Milk Marketing Order (FMMO) pools, Farmshine first reported the $1.48 billion in FMMO revenue gap across 7 of the 11 FMMOs that are multiple component pricing orders. The article and above chart were published in the September 18 edition. September losses will be reflected in FMMO reports in mid-October, and so far PPDs for September milk are mixed, some positive and some negative, but all are well below what would be the case under the old Class I pricing method.

This week, AFBF dairy economist John Newton pegged the cumulative loss to Class I value, alone, at $2.00 per hundredweight or $403 million to-date, across all FMMOs just on Class I milk — money unpaid to farmers that stayed in processor pockets. That figure is about 28% of the $1.48 billion component loss figure shown in FMMO negative balance and it correlates to Class I utilization being roughly 28% of total U.S. milk volume.

The Farm Bureau summary also shows the concentrated loss of $436 million in Class I value for May through October 2020. (Interesting coincidence: DFA is today the largest Class I milk bottler with the May 2020 acquisition of 44 of Dean Foods’ 57 milk bottling plants at a bankruptcy auction price of $433 million.)

“Due to the rapid rise in Class III prices and a modest increase in Class IV prices, the spread between the two was $6.83 per hundredweight in July, $10.96 per hundredweight in August, $10.30 per hundredweight in September and (will be) $3.56 per hundredweight in October,” writes Newton this week in the Farm Bureau analysis.

“As a direct result of no longer including the higher-of in the milk price formula, the Class I milk price never fully captured the rally in Class III milk prices. Instead, the new Class I milk price was as much as $4.57 per hundredweight below the higher-of formula price in August and $4.26 lower in September,” he continues. 

“As identified in Figure 2 (above), had the higher-of formula still been in place, the Class I mover would have exceeded $24 per hundredweight in August,” states Newton.

Newton cites a Class I minimum example for the Southeast, stating that these losses are “before Class I location adjustments are added. In South Florida, for example, with the $6 per hundredweight location adjustment, the Class I milk price would have been more than $30 per hundredweight in August 2020.”

Newton notes that from May 2020 to October 2020, the average difference between the old and new Class I milk price formulas was $2.04 per hundredweight in favor of the beverage milk processor. This means that the regulated minimum prices fluid milk processors had to pay dairy farmers from May through October 2020 were an average of $2.04 lower than what they would have been if the higher-of was still in place.

Going back to May 2019 when the new Class I formula was implemented, Newton notes that the Class I milk price was 62 cents per hundredweight lower on average for the past 19 months compared with the pre-farm bill higher-of formula. (Fig. 3 above)

When looking just at the 12 months pre-Covid from May 2019 to May 2020, the new Class I calculation added 9 cents per hundredweight to Class I pooled volume.

Newton writes that the Class I volume, alone, saw a $32 million benefit in the new Class I pricing in the first 12 months May 2019 through April 2020. Post-Covid, the new Class I pricing method is reflected as a $436 million loss May to October 2020, so the cumulative loss is estimated at $403 million over 19 months of implementation.

This analysis, says Newton, was based on actual Class I pool volume as determined pre-Covid, and does not account for the impact on all milk in and out of the pool for which producers were paid at or near FMMO blend price, before deductions.

The bottom line in looking at the Farm Bureau analysis, along with our own past four months of analysis, the new way of calculating Class I – per the 2018 Farm Bill – would be a relatively benign factor in a ho-hum market if dairy product and component values were at least somewhat accurately reflected across multiple manufacturing classes.

On the other hand, it works poorly in a lopsided market where markets are disrupted, huge government purchases occur on some products and not others, and where huge imports of some products (butter) and not others (cheese) impact accumulating inventory differently for the different milk classes.

While magnified in a severe market disruption like Covid-19 has created, the dairy “market” complex has had lopsided markets in the past and will again in the future at some level. The fact that this pricing change was made without a national hearing and without a dairy producer vote and without an FMMO administrative hearing is concerning.

Some members of Congress have stated that National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) — together — agreed on and requested this Class I pricing change and that Farm Bureau took a non-position, making the change a “no-brainer” for Congress to include in the Farm Bill. 

Farm Bureau had done analysis before the change was implemented showing the average over time was neutral. But neutral over time does not reflect month to month cash flow impacts and messed up risk management tools when markets diverge.

What we see in this so-called “neutral” change is the capacity for processors to manipulate the transfer of market value by playing one class against others and essentially removing ‘market value’ from producer milk checks.

Congress needs to hear the story of how dairy farms are impacted in their cash flow and use of risk management tools when a minimum of $1.48 billion in component value is simply sucked out of milk checks over a 4-month period. 

Yes, CFAP payments help dairy farmers. But government payments lead dairy even farther away from establishing market value to become more reliant on government payments that, quite frankly, come with more and more strings attached.

Remember, USDA Dairy Programs responded in a Farmshine interview in August to explain that the value missing from pools is “still in the marketplace” even if it doesn’t show up in the FMMO blend prices.

Specifically, USDA stated in that August 3 email that, “The blend price (SUP) is a weighted average of the uses of milk that was pooled for the marketing period (month). If some ‘higher value’ use milk is not in the ‘pool’ then the weighted average price will be lower. It is important to note that the Class III money still exists in the marketplace. It is just that manufacturing handlers are not required to share that money through the regulated pool. 

From the looks of milk checks shared in Farmshine’s Market Moos survey in June and July — and looking at the All-Milk prices reported by USDA through August — this ‘money that still exists in the marketplace’ has been largely unshared with producers.

The Class I pricing change was made, according to NMPF / IDFA to so that Class I processors could manage their price risk with forward contracting.

However, CME market brokers and analysts who were questioned about the use of forward contracting by Class I milk bottlers say that few, if any, are doing it. Part of the NMPF / IDFA push for this change was their statements that Class I bottlers would use risk management to stabilize their milk costs if the higher-of method was abandoned in favor of “averaging”.

In fact, some analysts we spoke with report there’s no incentive – even with the new formula – for processors to forward contract a perishable, quick-turnaround product like gallon jug milk. It doesn’t sit in a warehouse like cheese or butter or powder.

… Unless it is shelf-stable ultrafiltered milk — like Coca Cola’s Fairlife products. Coca Cola purchased the remaining shares of Fairlife from the Select Milk Producers cooperative on Jan. 3, 2020 — just 9 months after the new Class I pricing method was implemented.

The industry said this Class I pricing change was needed so that fluid milk processors could stabilize prices and in turn be positioned to invest in fluid milk processing and innovation, which would help dairy producers in the end by providing more Class I markets.

But what happened? Just 6 months after the new Class I pricing method was implemented, the largest fluid milk bottler, Dean Foods, filed for bankruptcy protection and sale in November 2019 with DFA waiting in the wings to buy. Then, 3 months after that, Borden filed bankruptcy and ended up selling to a consortium headed by former Dean CEO Gregg Engles.

Farm Bureau’s analysis this week estimates the impact on dairy farmer revenue from a purely Class I perspective. It does not quantify the full extent of component value removed from FMMOs in the process. Thus, the $403 million cumulative loss impact declared by Farm Bureau represents about 28% of the total loss – which is equivalent to the current nationwide Class I utilization.

This is a Class I pricing calculation change, but its impact on FMMO blend prices and farm-level mailbox prices is pervasive.

In addition, it is important to be aware in this discussion of loss impacts that there is absolutely zero method of calculating the market value of fresh fluid milk. It is not possible to determine what fresh fluid milk is worth because it is:

1)      Regulated by federal and state milk marketing orders and boards,

2)      Used as a loss-leader by supermarkets selling it far below its cost – especially the largest milk bottling retailers like Walmart and Kroger, and

3)      Federal government restrictions on the fat level of milk children are “allowed” to consume at school or daycare.

In short, the federal government controls fluid milk through USDA in lockstep with NMPF / IDFA — and don’t forget, DMI. Dairy checkoff figures prominently in this equation with the same heavyweights at the same table — pushing fat-free, low-fat, ultrafiltered, shelf-stable products, even 50/50 plant-based blends. 

Even DMI CEO Tom Gallagher is on record stating that the white gallon isn’t the future because even if children can have whole milk “innovation” is needed and admitting that his job is to “get processors to do stuff with your milk”. 

For processors to “do stuff with your milk”, they have to be promised a bigger margin. This could explain why the forward-looking focus of farmer-funded checkoff efforts is on innovation (processing partner margin), not on promoting and educating consumers about fresh fluid milk. And, it might explain why this new Class I formula was needed to average the only so-called market value left in the so-called dairy market.

CFAP payments are salve on some wounds, but the larger issue is still clear: Dairy producers need a voice — apart from the organizations that claim to represent them.

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Negative PPDs cost dairy farmers $1.48 billion in UNPAID component value for June-Aug milk, Sept. figures will be announced soon

By Sherry Bunting, published Sept. 14, 2020 in Farmshine

BROWNSTOWN, Pa. — The negative Producer Price Differentials (PPDs) persisted in final payments for August milk received by dairy farmers in mid-Sept., according to uniform prices announced by USDA Federal Milk Marketing Orders September 11 and 12.

This pushed uniform prices lower in some Federal Orders, while others were higher. (See chart above).

The bottom line is a cumulative loss impact of $1.48 billion in UNPAID market value of milk components across the seven Multiple Component Pricing Federal Milk Marketing Orders (FMMOs) — not to mention unquantified losses in the 4 fat/skim pricing FMMOs — after three months of significantly negative PPDs for June, July and August milk as paid in July, August and September 2020.

Losses incurred by the four Fat/Skim Pricing Orders, but are not easily quantified on the FMMO pool balance sheet and were most pronounced in June for those FMMOs.

More losses will be added for September milk, paid in October, and the CME futures indicate loss impacts could continue through yearend.

This unpaid component market value — represented by negative PPDs (the difference between the uniform price and the announced Class III price) — has cost dairy producers using risk management tools even more as such tools utilize primarily the Class III price as a market indicator. When the Class III price rallies, but the milk check doesn’t mirror that, a producer can be left without the higher price in the milk check and without the coverage through the risk management at the same time.

This would be like having a fire and having the adjuster look at a neighbor’s intact house to determine no claim, instead of looking at the house that burned. When the market says ‘no fire here’ but the house burned down just the same, it’s a double-whammy.

Remember, fluid milk does not have a ‘market’ because the Class I price is both regulated at varying degrees by state and federal marketing orders, and at the same time, fluid milk is used as a loss-leader by the nation’s largest supermarkets. Thus, it is impossible to determine the “market value” of fluid milk.

Add to this the restriction of fat content in schools and other institutional feeding by the federal government, and market value of fluid milk – especially whole milk – is further impinged by non-market factors.

This means the value of the components in fluid milk can only be assigned by the value of dairy products made with milk. When that market rallied on Class III, while plummeting on Class IV, the “market” value was pulled instead of pooled.

Several factors are creating the problem.

First, Covid-19 caused disruption in markets that are now heavier on the retail side and lighter on the foodservice side. The industry is adjusting to this.

Second, a ‘band aid’ approach to milk pricing reform in the 2018 Farm Bill changed the Class I relationship to an uptrending manufacturing class market by using an averaging method instead of the “higher of” Class III or IV. This is just one reason a national hearing on milk pricing with report to Congress is long overdue.

Third, the spread between Class III and IV milk futures persists, so even when Class I and Class III were close in price for August, Class IV and II were so far behind that negative PPDs and de-pooling occurred. Current levels show a $4 to $5 spread for September and October and $2 to $3 for November and December.

Fourth, government purchases and import-export factors are affecting storage of Class III and IV products differently, which in turn affects the markets differently.

As mentioned previously in Farmshine, the most recent USDA Cold Storage Report showed butter stocks at the end of July were up 3% compared with June and 13% above year ago. On the other hand, total natural cheese stocks were 2% less than June and up only 2% from a year ago.

On the import side, the difference between cheese and butter is stark. Cheese imports are down 10% below year ago, but the U.S. imported 14% more butter and butterfat in the first seven months of 2020 compared with a year ago.

Is it any wonder butter stocks are accumulating in cold storage to levels 13% above year ago at the end of July — putting a big damper on butter prices and therefore Class IV?

Butter demand is up. Butter imports are up. But the PRICE of butter is at the lowest level since 2013.

Analysts suggest that butter and butterfat imports are higher because U.S. consumer demand for butterfat is higher. But that reasoning doesn’t make sense because the Class IV price and butterfat value is depressed because of “burdensome inventory of butter” in cold storage, holding back butter prices and amplifying the Class III and IV divergence that is at the root of the negative PPDs.

Again, a national hearing on milk pricing is long overdue. Even the risk management tools touted by USDA do not perform as expected due to inverted and divergent price relationships and reduced ability to transfer market value.

On October 5, 2020, American Farm Bureau published its analysis which evaluated a similar loss impact. Read the AFBF analysis here

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USDA announced $14 bil in CFAP 2 payments, Dairy estimate is $1.20/cwt for Apr-Dec milk

Second checks under CFAP 1 delayed by enrollment extensions

By Sherry Bunting, Farmshine, Sept. 25, 2020

WASHINGTON, D.C. — President Donald Trump and U.S. Secretary of Agriculture Sonny Perdue announced an expansion of the Coronavirus Food Assistance Program (CFAP) on Sept. 17, which means a second round of $14 billion in additional CFAP payments will be made to a new list of eligible commodities, including dairy cow’s milk as a price-trigger calculation and even goat’s milk as a sales-triggered calculation.

Sign up for this second round of assistance – CFAP 2 — runs from Sept. 21 through Dec. 11, 2020.

CFAP 2 payments for dairy calculate to a little over $2.00 per hundredweight on the equivalent of April through August milk marketings. However, the calculation boils down to $1.20/cwt on actual April through August milk marketings, plus another $1.20/cwt on the estimated September through December milk marketings – a 4-month period – using the average daily milk production from the prior 5-month’s actual marketings.

Specifically, the announcement describes the CFAP 2 dairy payments as follows:

Payments for cow milk under CFAP 2 will be equal to the sum of the following:

1) The producer’s total actual milk production from April 1, 2020, to August 31, 2020, multiplied by the payment of $1.20 per hundredweight, and

2)  The producer’s estimated milk production from September 1, 2020, to December 31, 2020, based on the daily average production from April 1, 2020, through August 31, 2020, multiplied by 122, multiplied by a payment rate of $1.20 per hundredweight.

This round of farm assistance, known as CFAP 2, follows in addition to CFAP 1.

The CFAP 1 payments were to be made in two stages, with enrolled producers having received most of their eligible payment in their first check. However, the second portion or balance of payments under CFAP 1 won’t be received until after all enrolled producers receive their first checks.

Producers have not yet received their second checks from CFAP 1 because the enrollment period for CFAP 1 was extended through Sept. 11. 

Further complicating payment of second checks under CFAP 1 is USDA’s extension of signups for certain counties in Louisiana, Oregon and Texas that were impacted by natural disasters (fires and hurricanes). Producers in those areas have until Oct. 9, 2020 to enroll in CFAP 1.

Once all enrollments in CFAP 1 are completed by Oct. 9, and once all enrolled farms receive their first checks for all eligible commodities under CFAP 1, then the remaining funds from CFAP 1 will be disbursed in the second checks to enrolled producers for eligible commodities, including milk.

CFAP 2, on the other hand, represents a totally separate second source of funding and assistance — and a second enrollment period — to cover market disruptions and additional marketing costs for the nine months period of April through December, whereas CFAP 1 covered mainly the disruptions for the first part of the year. There is some overlap in the time period, but these are two separate enrollments and calculations under CFAP.

To-date, according to USDA, nearly $1.75 billion has been paid to dairy farmers for milk under CFAP 1. The total paid or approved for payment to-date for all commodities under CFAP 1 is $10.2 billion.

Funds for CFAP 1 and 2 are from a combination of the CARES Act and the CCC. USDA used public feedback to make improvements under CFAP 2, according to Secretary Perdue.

CFAP 2 divides commodities into three categories for compensation as 1) Price Trigger Commodities, 2) Flat-rate Crops, and 3) Sales Commodities. Each category has a different method for calculating a payment.

Eligible livestock, including beef cattle and dairy cattle destined for beef, will be based on maximum owned inventory on a date selected by the producer between April 16 and August 31, 2020. USDA FSA personnel report that it’s okay if the date selected by a producer is within the same window as the date selected for CFAP 1 livestock payments as long as the animals in inventory on that date were destined for market as meat animals, not for dairy purposes.

USDA FSA personnel indicate that cull dairy cows are not eligible livestock under CFAP 2, but bull calves and any heifers identified as market animals for beef or veal can be claimed as inventory for market impact payments under CFAP 2.

Corn silage and other forages grown as feed for dairy cattle are also eligible under the corresponding flat rate acreage crops portion of CFAP 2

A complete list of farm commodities covered under CFAP 2 is available at farmers.gov/cfap

As with CFAP 1, there is a payment limitation of $250,000 per person or entity for all commodities combined. Applicants that are corporations, LLCs and partnerships may qualify for additional payment limits when members actively provide personal labor or management to the operation. 

In addition, USDA reports that this special payment limitation provision has been expanded to include trusts and estates for both CFAP 1 and 2.

Producers will also have to certify they meet the adjusted gross income limitation of $900,000 unless at least 75% or more of their income is derived from farming, ranching or forestry-related activities. Producers must also be in compliance with Highly Erodible Land and Wetland Conservation provisions to receive payments.

USDA reports that Farm Service Agency staff at local USDA Service Centers will work with producers to file CFAP 2 applications. Producers interested in one-on-one support with the CFAP 2 application can also call 877-508-8364 to speak directly with a USDA employee ready to offer assistance at the call center.

Farmers can also visit farmers.gov/cfap for additional information.

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Analyst says global trends suggest ‘mediocre’ year in 2021

Huge new cheese processing capacity is negative, a somewhat ‘balanced’ global powder inventory is positive

During the Dairy Financial and Risk Management Conference held virtually by Center for Dairy Excellence via Zoom, Matt Gould of Dairy Market Analyst Inc. showed how four long-term global dairy cycles were anticipated for 2017 through 2020 and are forecasted to be mostly neutral or “mediocre” for 2021. Zoom conference screenshot

By Sherry Bunting

HARRISBURG, Pa. — Back in December of 2019, “No one thought 2020 would be a bad year. What wallops you over the head are the unknowns,” said Matt Gould, president of Dairy & Food Analyst Inc. last Wednesday during the Center for Dairy Excellence Risk Management Conference held virtually. The list of over 100 attendees was a v‘who’s who’ of dairy market analysts, brokers, cooperative marketers, consultants and lenders with a sprinkling of farmers.

As for the 2021 outlook sitting here in September with so many unknowns, Gould said the consensus is next year will be a “mediocre” year for dairy markets.

“We can only talk about the known-knowns, with plenty of room for surprises,” he said, focusing on four long-term trends through forecasting models.

From a high level view, Gould said the conflict between indicators that are price-supportive and indicators that are price-negative will temper each other to be more-or-less “a wash in terms of market direction” – except for the influence of surprises one way or the other.

He discussed these trends within the context of how a producer’s milk check is figured, looking at cheese and whey setting the Class III price and butter and nonfat dry milk setting Class IV.

Putting some emphasis on the huge new cheese production facilities coming into operation at the end of 2020 and first quarter of 2021 in both the U.S. and Europe, Gould’s forecast for product prices included low cheese prices next year, stable butter prices, and the highest skim milk powder prices the world has seen in a long time.

The 3-year cycle

The 3-year cycle is still one of the four patterns that most people are familiar with. Historically, it has done a good job of reliably nailing the highs and lows, but not how high or how low, said Gould.

It is also the simplest of the four major patterns. If 2018 was the low in a 3-year cycle, then 2021 will be the next low – 2006, 2009, 2012, 2015, 2018…. 2021.

The global milk supply cycle

The second cycle Gould talked about was the global milk supply cycle, and this cycle is “neutral-ish” for 2021.

Globally, there is milk production growth, but it is not surging, said Gould.

“That’s the good news. We don’t have this wall of milk coming at us, but the flip side is that we don’t have a big contraction either to set us up for really good milk prices like in 2014,” he explained.

Globally, farmers have grown milk production through June, but only by 1 billion pounds per month. “When we cross that 1.5 to 2 billion pounds per month threshold, that’s the guard rail. That would be excessive over-supply territory,” said Gould. “We want some growth to keep balance with demand. There is rising dairy demand as the population grows and the middle class rises, but if we get over that guard rail, then growth becomes inventory.”

So, on global supply as a cycle, 2021 is neutral because global production is growing, but at a pace that should mirror demand growth.

The inventory cycle

On the global dairy inventory side, Gould said the set up into 2021 is “more price supportive.” Mainly because the global supply of the world’s balancing product – milk powder – is on the tight side of adequate.

“When we have big powder inventory, it overhangs the market and prices tend to be lower. Spikes happen when the trade is drawing down supply or when there is no overhang,” said Gould.

Heading into 2021, he said the dairy market with respect to global milk powder inventory “is in a price inflationary zone. We don’t have big inventory and we’re not setting up to build big inventories, so the risk of a good year for milk prices is still in there within this inventory cycle.”

The inventory cycle is setting up to be a price supportive one for 2021.

The trade cycle

Over the past 20 years, the world has gone through a period of booking trade agreements rapidly and aggressively. “We got new customers, grew exports, saw new opportunities and new demand,” said Gould. “The bad news is we have not booked any new WTO-style agreements in a long time.”

Gould explained that WTO-style agreements are the kind that give dairy access to new markets that grow quickly as opposed to more sales within existing markets that grow slowly.

Those WTO-style agreements of the past presented a “trade tailwind” fueling rapid market growth. “This lack of a trade tail wind is price negative for 2021,” said Gould. “The long-term view shows a lack of new global demand growth, which will hurt us.”

Gould acknowledged that the U.S. is getting a new style of trade agreement. “We have trade negotiations ongoing with several countries and we have taken existing agreements and negotiated new ones with the same customers. So, we are seeing new market access but not the advantages of WTO-style access.”

Gould sees the change from rapid growth to steady access in this trade cycle as setting up to be price negative.

Taken together, these four cycles show 2021 setting up with two neutrals, one negative and one positive.

Class III and IV expected to flip

As the indicators will be mixed, so will dairy product markets.

Gould’s cheese forecast is for an average $1.62/lb and his forecast for nonfat dry milk is that prices could reach $1.23/lb.

In farm milk checks, said Gould, it’s no simple task how milk prices get determined. “We use end products so it’s not a question of what the milk is worth, but what these products are worth, and it subtracts-out the cost of making the products and a yield factor too.”

Ostensibly, the Class II prices uses Class IV and the Class I price uses all the classes.

With Class III so much higher presently than the other classes, Gould noted the switch is setting up to flip for 2021.

Milk powder prices are expected to rise into and through 2021 because the big surpluses are gone and 2019 production kept pace with demand, which ended up drawing down on global powder supplies even further, with 2020 being more in balance heading into the first half of 2021.

While a penny change in nonfat dry milk price brings 8 cents to Class IV price a penny change in butter equates to 4 cents change in the Class IV price. Powder will be the more positive side of the 2021 setup compared with butter, according to Gould.

“The global butter market in 2020 saw big destruction of food service demand, which affected cheese, so processors (globally) made more butter, and foodservice is not using as much butter,” said Gould.

“In the short-term, there is an overhang of butter inventory, especially in the U.S., where we had big destruction of demand and the lowest butter price since 2013,” said Gould. “But people call me and say they can’t find butter on the shelf at the store, so how can this be?”

How can we have the lowest wholesale butter price and not be keeping up with retail demand?”

Gould explains that 55% of U.S. butter consumption pre-Covid was foodservice – going out to eat. In this pandemic environment, the foodservice industry has been devastated. Open Table, a company that books restaurant reservations estimates foodservice is still down by half and full-service restaurants are decimated.

“On the flipside, retail butter sales have been extraordinary at times, with some weeks more than doubled over year ago,” said Gould. But plants in the U.S. are specialized moreso than in Europe where dairy plants are more flexible making more different products instead of specialized for high volume and efficiency.

Matt Gould, Dairy Market Analyst Inc. talked about the differing market and inventory conditions for dairy products into the end of 2020. U.S. butter exports are down, imports are up, and U.S. butter inventory has been built up. Globally, butter is well supplied as more versatile plants in Europe switched from cheesemaking to butter when Covid-19 shut down the restaurant trade.   Zoom conference screenshot

“Where we have the bottleneck in the U.S. is turning bulk butter into quarter pound sticks for retail,” he said, adding that in the past21 days, retail butter sales have slowed to show smaller growth rates over year ago.

In short, while holiday sales will help boost fourth quarter, it won’t make much difference in the overall butter picture because “we’ve already gone through the demand destruction and the inventory is already built. We have more butter in stock than we have domestic sales so we are in surplus,” said Gould.

Gould did not specifically mention the large imports of butter and butterfat into the U.S. from March through July, but he did reference the bottleneck in turning enough bulk butter into sticks for retail. As this pushed retail butter prices higher, Gould noted that importing was incentivized.

Cheese is where some “known surprises” come into play.

The U.S. will see significant new cheese production capacity becoming operational in November (Michigan) and the beginning of 2021 (Minnesota).

“Every one penny in cheese price change is 10 cents of change on the milk check,” Gould pointed out. “As a globe, we are in relatively balanced to tight supply on cheese in the second half of 2020, but the forecast heading into 2021 is driven by the factories and capacity being built.”

He said the long-term export trend for cheese is positive. It has been a “winner” during Covid because the big cheese purveyors are pizza companies that were the first to adopt low and no-contact delivery and saw their sales surge 20% higher.

But new cheese processing capacity in the U.S. and in Europe will present short-term concerns.

“We will see huge growth in cheese processing,” said Gould. The plant in St. John’s Michigan as a joint venture of DFA, Select and Glanbia will be the sixth largest in the country.

“We have never opened a plant in the U.S. that big – that fast – in history. This is a first, and these types of plants have to be run full, or you will lose your tail,” he said, noting these types of plants in the American cheese business operate on margins of 0.5% (one half of one percent). “They’ll make a penny on a $2/lb cheddar price. That’s why they fill full and build to scale and magnitude to make volume.

“The consequence of that is a shock increase in supply,” said Gould. “Demand doesn’t grow that same way. We don’t wake up and see new demand present itself as a shock-increase like that.”

Some wild cards do exist, including government intervention. What we’ve seen already this year in dairy purchases is greater than dairy has seen in a long time.

“Government purchases (CFAP) are using 2.5 to 3% of the U.S. milk supply,” said Gould. “Normally we forecast within 1% to say a year will be good or bad, but when those purchases end, we are talking about 2.5 to 3%. That’s a huge number. That’s a price negative thing if all of a sudden there’s 2% more milk on the market without government purchases.”

The flip side, he said, is “We are going through a crisis, and people are hungry. When you have hungry people, the prescription is to get them food.”

In this way, government purchase could be a positive wild card if they continue under circumstances where economic slowdown impacts domestic demand. 

Other wild cards of course include the progress on a vaccine for Covid, and the status of the economy and foodservice. Positives in those areas could unleash demand for products that can be made quickly in bulk without the bottlenecks of serving retail demand.

— Previously published in Farmshine, Sept. 25, 2020

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DFA antitrust lawsuit in Vermont ends before jury trial began

Potential settlement details undisclosed; Case had revealing ‘wins’ over four years, but FMMO 1 map limitations posed problems 

By Sherry Bunting, Farmshine, October 2, 2020

BURLINGTON, Vt. – In an unexpected twist this week, the civil antitrust case Sitts et. al. vs. Dairy Farmers of America / Dairy Marketing Services was dismissed on the eve of the jury trial that had been set to begin Sept. 30 in the U.S. District Court of Vermont with Judge Christina Reiss presiding.

A Stipulation of Dismissal with Prejudice was accepted by attorneys for defendant DFA / DMS and the 116 dairy farmer plaintiffs that had opted out of the previously settled Northeast Class Action Antitrust lawsuit to file the civil suit.

The Stipulation of Dismissal with Prejudice docket simply states: “The parties hereby stipulate to the dismissal of the above-captioned action with prejudice,with all rights of appeal waived, and each party to bear their own costs and attorney’s fees.”

A ‘stipulation of dismissal with prejudice’ is a legal term meaning that the case is over and done with and can’t be brought back.

We have learned that the stipulation requires parties to not discuss the terms of the “dismissal”, which means that settlement details will not be disclosed as public information.

Over the four years since the civil antitrust case was filed in October of 2016, some of the 116 plaintiff dairy farmers have since exited dairy farming.

Dairy farmers who looked forward to “a day in court” with a jury hearing evidence about the increasingly concentrated and anti-competitive milk marketing environment they live every day are likely disappointed by this outcome.

But even though this case is over, some ‘wins’ happened over the four years that could accomplish transparency in smaller case filings in the future. 

Throughout the four years, information about the alleged antitrust monopsony actions of defendant DFA, and the position of the plaintiffs as dairy farmers, was revealed at intervals during the proceedings.

Judge Reiss’s Opinion and Order exactly a year ago on Sept. 27, 2019 is one example.

Her Opinion and Order on this case in denying in part DFA’s request for summary judgment stated that, “Plaintiffs’ identify evidence that several of Defendants’ agreements violate a 1977 Consent Decree and Defendants’ own Antitrust Policy and Guidelines. A rational jury could find this evidence demonstrates that Defendants’ ‘acquisition of [ monopsony] power’ was through ‘predatory means.’”

In fact, this 58-page Opinion and Order, along with the amicus brief filed by the U.S. Department of Justice as a Statement of Interest in July, have provided support for others to move forward in smaller cases seeking vital financial information about the workings of DFA, the cooperative of which they are members. (More on that in the future.)

The DOJ statement filed in the Vermont antitrust case in July stated that the alleged activities fall outside of Capper-Volstead protections and that the allegations in the case “do not appear to have involved efforts to increase farmers’ bargaining power but rather efforts at monopsonization.”

The DOJ’s 15-page statement filed in July 2020 represents the first time the DOJ has really weighed-in on the monopsonization of milk markets to basically say the “heartland protections” of the Capper-Volstead Act do not apply to the activities alleged.

In fact, DOJ stated in the brief that the claims at issue fell outside the Capper-Volstead protection because “they do not involve claims that farmer cooperatives acted anticompetitively against processors and other middlemen, but rather that these were claims that farmer cooperatives through agreements with processors, middlemen and other cooperatives, acted anticompetitively against other farmers.”

Part of the issue for the plaintiffs in the Vermont antitrust case — throughout the procedural elements of four years — was that exhibits, testimony, depositions about activities just outside of the Northeast Milk Marketing Federal Order One lines on an arbitrary map were deemed outside the jurisdiction of the case.

It is interesting to note that even evidentiary exhibits at the case docket about activities in central Pennsylvania was scratched from use in the trial simply because central Pennsylvania is one of several geographies in the Northeast that are technically “unregulated” by FMMO 1 and thus not included in the FMMO 1 “map” — even though central Pennsylvania is surrounded on one side by FMMO 1’s map and on the other side by FMMO 33’s map, and the milk from these farms moves through these FMMO marketing channels, plants and cooperatives.

So many moving parts to assemble and so many challenges to use information subject to exclusion based on FMMO maps, it boggles the mind.

Similarly, ‘collaborations’ of one sort or another — revealed through exhibits, testimony, depositions and the like — that occurred in other FMMOs linked to how milk markets function in FMMO 1, or showing a pattern of behavior, were also deemed outside the jurisdiction of this case.

This, despite defendant DFA / DMS being a national footprint milk cooperative that interestingly draws its own area council maps in ways that blend geographies between FMMOs. This, despite defendant DFA / DMS in testimony before the Pa. Milk Marketing Board or in requests made to FMMO 1 market administrators often positions itself as the all-knowing one on milk flow from its birdseye view of the national, even global, dairy grid.

A basic tenet of the case was plaintiff’s claim that DFA is ’empire-building’ not bargaining on behalf of farmer members. During the four years of process on this case, information has been revealed, but DFA has continued to boldly forge its dairy dominance by aggressively bringing the Northeast regional cooperatives and independents that had been market-managed by DMS into the milk supply membership structure of DFA-proper 2017 through 2019, and then acquiring 44 of Dean Foods’ 57 fluid milk plants across the country in 2020.

DFA was listed by Rabobank last month as the largest dairy processor in the United States and third-largest dairy processor globally behind Nestle and Lactalis.

Through additional partnerships, joint ventures and marketing alliances, DFA has a hand in every pie, and no one, not even its members, really knows how the milk (and revenue) really flows.

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MARKET MOOS: Whole milk up 6.5%, Negative PPDs = $1.47 bil. unpaid value, Jan-July imports mirror butter inventory growth

By Sherry Bunting, Farmshine, Sept. 11, 2020 and preview Sept. 18, 2020

Whole milk sales up 6.5% Jan through May, total milk sales flat

While consumer packaged goods (CPG) reports indicate fluid milk sales being up 4 to 5% through the Coronavirus pandemic — and flattening as of the end of August back to year ago levels — the other side of that coin is the loss of institutional, foodservice and coffee house demand. Thus, the extra CPG sales at supermarkets slightly more than covered the lost usage in foodservice and the net wholesale volume of fluid milk sales reported by milk handlers January through May 2020 was virtually unchanged (up 0.2%) compared with a year ago, according to USDA.

Within that volume are some important shifts. Conventional fluid milk sales to all uses were down 0.5% vs. year ago in the first 5 months of 2020 while organic fluid milk sales were 14% higher than a year ago.

Within the conventional milk sales, whole milk was up 6.5% and reduced fat (2%) milk was up 3.3%. Also gaining in sales January through May 2020 were “other” fluid milk sales, which includes ultrafiltered milk such as Fairlife, up 10.5% vs. year ago.

The big losers were fat free milk down 12% from year ago and flavored fat reduced milk down 22%.

These numbers were reported in the most recent USDA product sales report. Given that this included the mid-March through early May period when shortages and purchase limits were put on fluid milk in many stores throughout the country, it will be interesting to see June and July data when they are reported in the next 30 to 60 days.

Clearly, consumers are shifting even more strongly to whole and 2% milk and away from 1% and fat-free milk. With organic sales also experiencing sales increases, it is a sign that consumers are looking at health indicators, and a sense for wanting what’s real, natural and perceived to be most local when choosing milk for home. At the same time, overall sales of conventional milk are negatively impacted by the steep drop in institutional, foodservice and coffee house demand.

Class I milk markets get demand push from gov. purchases

At the wholesale milk handler level, USDA reports tightening milk supplies in the eastern U.S. relative to Class I usage. Specifically, the USDA Eastern Fluid Milk and Cream Report Wednesday, Sept. 9 indicated Class I sales picking up this week in the Northeast with balancing operations receiving steady to lighter milk volumes compared with recent weeks.

In the Mid-Atlantic region, milk reported to be adequate for Class I needs, and loads traveled to the Southeast for immediate needs as USDA reports Southeast milk production is tight and output is down with most milk loads clearing only to Class I plants and no loads to manufacturing.

USDA reports production of seasonal milk beverages such as pumpkin spiced flavored milk and eggnog have begun to pick up.

USDA reports that the steady to higher Class I demand is due to some schools returning to session along with government programs purchasing extra loads from manufacturers this week. In fact, reports USDA, bottlers in eastern markets are receiving milk from other regions, which is loosening up the previously tighter cream availability.

Block cheese rallies past $2/lb, but futures rally is short-lived

Cheese markets made significant gains for the third week in row, fueled in part by the third round of USDA CFAP food box purchases for delivery October through December 2020.

On Wed., Sept. 9th, 40-lb block Cheddar was pegged at $2.1575/lb — up 25 cents from a week ago with a single load trading. The 500-lb barrel cheese price was pegged 10 cents higher than a week ago at $1.67/lb, with zero loads traded. The barrel price had reached $1.70 earlier in the week before backing down Wednesday, taking early week futures market gains along with it.

The block to barrel spread is at its widest level of 48 cents per pound, an indicator of cheese market vulnerability and volatility for the longer term.
Butter loses cent, powder gains cent

Spot butter lost a penny with a significant 13 loads trading Wednesday on the CME spot market, pegging the price at $1.50/lb. Nonfat dry milk gained a penny at $1.0425/lb with 3 loads trading.

Negative PPDs persist, unpaid component value across 7 MCP Orders totals $1.47 billion for June through August milk

Look for more on this in the 9/18 Market Moos in Farmshine, but for now, here’s a chart I’ve compiled showing relevant information for August, July and June 2020 vs. same month year ago in 2019.

The bottom line is three months of significantly negative PPDs resulted in $1.47 billion in total unpaid component market value across the 7 Multiple Component Pricing Federal Milk Marketing Orders.

Losses were also incurred by the 4 Fat/Skim Pricing Orders but are not easily quantified on the FMMO pool balance sheet.

This has cost dairy producers even more who have paid to manage risk through a variety of tools because those tools only work when the milk check follows the market higher to provide the protected margin. When the market says ‘no fire here’ but the house burned down just the same, it’s a double-whammy.

Remember, fluid milk does not have a ‘market’ because it is regulated or used as a loss-leader by the nation’s largest supermarkets. Thus, the value of the components in fluid milk can only be market-valued in the other products made with milk that “sort of” have a market. When that market rallied, the value was pulled instead of pooled.

Instead of ‘band aid’ approaches to milk pricing reform, given the Class I change made in the 2018 Farm Bill has been a disaster, it’s long past time for a national hearing on milk pricing with report to Congress.

Read on, to see how other factors such as imports vs. exports affect storage anc contribute to unprecedented market misalignment.

Close-up Cl. III / IV spread widens, average for next 12 months narrows

The spread between Class III and IV milk futures widened to a $4 to $5 spread for September and October, $2 to $3 for November and December. But the average over the next 12 months for both classes in CME futures trading has narrowed this week.

The Class III futures contract for September traded at $16.62/cwt Wednesday, Sept. 9 — fully steady with a week ago while Class IV traded 15 cents lower than a week ago at $12.83.

October’s Class III futures contract traded at $18.48 Wednesday, down 54 cents from a week ago, while Class IV traded at $13.64, down 40 cents.

The next 12 months of Class III milk futures closed the Sept. 9 trading session at an average $16.68 — down 24 cents from a week ago.

The next 12 months of Class IV futures averaged $15.03 — down 4 cents from a week ago.
At these midweek trading averages, the spread between Class III and IV over the next 12 months averages at $1.65/cwt — 20 cents tighter than the previous Wednesday.

Import-Export factors affect storage, which in turn affects markets

As mentioned previously, the most recent USDA Cold Storage Report showed butter stocks at the end of July were up 3% compared with June and 13% above year ago. Total natural cheese stocks were 2% less than June and up only 2% from a year ago. Bear these numbers in mind as we look at exports and imports.

According to the U.S. Dairy Export Council (USDEC), total export volume is up 16% over year ago year-to-date – January through July. For July, alone, total export volume was up 22% over year ago. Half of the 7-month export volume was skim milk powder to Southeast Asia. January through July export value is 14% above year ago.

However, butterfat export volume averaged 5% lower than a year ago year-to-date. The big butter export number for July was not enough to make up for the cumulative decline over the previous 6 months.

On the import side, the difference between cheese and butter is stark. Cheese imports are down 10% below year ago, but the U.S. imported 14% more butter and butterfat in the first 7 months of 2020 compared with a year ago.

The largest increase in butter and butterfat imports occurred in the March through June period at the height of the pandemic when retail butter sales were 46% greater than year ago.

Looking at these butter imports another way, is it any wonder butter stocks are accumulating in cold storage to levels 13% above year ago at the end of July — putting a big damper on butter prices and therefore Class IV?

The U.S. imported 14% more butter and butterfat and exported 5% less butter and butterfat year to date while storage has been running double-digits higher, up 13% at the end of July.

As accumulating supplies pressured butter prices lower, the U.S. became the low price producer and exported a whopping 80% more butter in July compared with a year ago. This was the first year over year increase in butter exports in 17 months. But the record is clear, year-to-date butter exports remain 30% below year ago and total butterfat exports are down 5% year-to-date.

Analysts suggest that butter and butterfat imports are higher because U.S. consumer demand for butterfat has been consistently higher — even before the impact of the Coronavirus pandemic stimulated butter demand for at-home cooking and baking.

This reasoning is difficult to justify — given there is 13% more butter currently stockpiled in cold storage vs. year ago keeping a lid on the wholesale prices (while retail prices rise) and undervaluing butterfat and Class IV milk price in the divergent milk pricing formula. If 14% more butter and butterfat are being imported, does this mean we need to import to serve consumer retail demand and keep larger inventory at the ready to serve that retail demand?

If so, why is the inventory considered so bearish as to hold prices back and thus amplify the Class III and IV divergence?

Does month to month cold storage inventory represent excess? Or does it simply represent a difference in how inventory is managed in today’s times, where companies are not as willing to do “just in time” and “hand to mouth” — after they dealt with empty butter cases and limits on consumer purchases at the height of the pandemic shut down this spring.

The trade has not sorted out the answers to these questions.

Meanwhile, these export, import, and government purchase factors impact the inventory levels of Class III and IV products very differently — and we see as a result the wide divergence between Class III and IV prices and between fat and protein component value.

Interestingly, USDA Dairy Programs in an email response about negative PPDs that have contributed to the wide range in “All-Milk” prices, says the higher value of components “is still in the marketplace” even if All-Milk and mailbox price calculations do not fully reflect it across more than half of the country.

Rep. Thompson and Keller want Whole Milk choice for WIC

The American Dairy Coalition, a national organization headquartered in Wisconsin, applauded Congressmen Fred Keller and G.T. Thompson, representing districts in Pennsylvania, for recently introducing a bill designed to offer an expanded variety of dairy products, including 2% and Whole fat milk, to participants of the Special Supplemental Nutrition Program for Women, Infants and Children (WIC). The bill, officially titled, “Giving Increased Variety to Ensure Milk into the Lives of Kids (GIVE MILK) Act,” would expand WIC offerings.

The Grassroots Pa. Dairy Advisory Committee joins the American Dairy Coalition in thanking Congressmen G.T. Thompson and Fred Keller for their dedication to trying to help nutritionally at-risk Americans have the ability to choose what dairy products fit the taste preferences of their families. Thompson is prime sponsor and Keller a co-sponsor along with 39 other members of Congress on another bill — the Whole Milk for Healthy Kids Act, H.R. 832 — aimed at allowing whole milk choice in schools too.

Current Dietary Guidelines have stifled Whole milk choice by recommending 1% and fat-free milk for children over 2 years of age even though Whole milk provides a nutritionally dense, affordable and accessible complete source of protein that children love.

Science shows consumption of these products promote a healthy weight in both children and adults and fends of chronic diseases.

“More initiatives such as the GIVE MILK Act are necessary to change the antiquated and unscientifically based notion that saturated fats are dangerous to public health,” states a press release from the American Dairy Coalition. “We encourage all members of the dairy industry to not only support the GIVE MILK Act, but also encourage their legislators to urge the Dietary Guidelines for Americans also be updated to remove caps on saturated fats, allowing once more the choice of whole milk in public schools. Children deserve the best — let’s give them whole milk!”

Look for more next week on what the Grassroots Pa. Dairy Advisory Committee and 97 Milk are working on to get the word out to “Vote WHOLE MILK choice in schools — Citizens for children’s immune-boosting nutrition.”

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Markets review and look-ahead, USDA pegs July ‘All-Milk’ at $20.50

U.S. All-Milk $20.50, DMC $12.41

The USDA NASS Agricultural Prices report calculated a U.S. All-Milk price of $20.50 for July, up $2.40 from the June All-Milk price of $18.10 and $1.80 higher than a year ago. With this as the pegged U.S. average milk price, the July Dairy Margin Coverage (DMC) margin was calculated at $12.41, also $2.40 higher than June and $2.91 above the highest level of DMC coverage.

These July USDA numbers are welcome, but tell half the story.

The chart above lists the July 2020 USDA All-Milk price calculations for the top 24 milk-producing states in descending order with the U.S. average highlighted.

What stands out is the range from top to bottom. It has doubled from a more typical $3 to $4 spread to an $8 to $9 spread in June and July 2020. This is the widest we could find on record — with the U.S. average All-Milk price standing fully $4.00 higher than the state with the lowest All-Milk price in June and July 2020 compared with a more typical $1.50 difference a year ago.

A year ago, 7 of the 24 USDA milk production report states were below the U.S. average, a more typical occurrence. In June and July 2020, 15 of the 24 states were below the U.S. average All-Milk price.

On the up-side of the chart, we see that the highest states are $4 to $5 above the U.S. average, when normally that difference would be less than $3.00.

Actual mailbox price calculations won’t be released for five months, and when they are released, the range will likely be even wider from top to bottom than the $8 to $9 spread we see in All-Milk prices the past two months.

Unofficial milk check surveys of volunteered data from dairy producers in six federal orders for June and July show a whopping $14.00 per hundredweight range from top to bottom in gross pay and mailbox net pay.

As for the August All-Milk price, USDA won’t report that until the end of September. We will get Federal Order uniform price announcements for payment of August milk in mid-September. On Sept. 2, USDA did announce August Class and Component prices with Class III (cheese) milk at $19.77, which is $7.24 above the Class IV (butter / powder) price of $12.53. Class II was announced at $13.27. The August protein price was pegged at $4.44 and butterfat $1.63.

Margin ‘equity’ affected by wide spreads

For dairy producers enrolled in DMC — but in regions receiving the lower end of these All-Milk prices in June and July — the safety net program thresholds were not met by the ‘average’ margin even as that margin did not reflect their reality. For dairy producers using a variety of risk management options, new challenges have also emerged in the current market dynamic due to de-pooling of milk making negative producer price differentials (PPD) more negative in some areas.

While the spread between Class III and IV looked like it would narrow this fall, an upswing in Class III futures for October through December contracts this week — and lackluster performance on Class IV — show spreads in manufacturing class values could widen again, which tends to be an incentive for de-pooling in Federal Orders where a mix of products, including Class I beverage milk, are produced.

There are tools to navigate these challenges, say the experts, but a deeper concern is how closely the divergence can be related to the product mix of the CFAP food box government purchase rounds — and changes in U.S. dairy imports.

As the third round of CFAP Farmers to Families Food Box purchases are underway for fourth quarter 2020 delivery, USDA this time set parameters for food box dairy products to be more representative of Class II and IV products, along with the Class III cheese products. In addition, the third round defines the fluid milk in several solicitations to be 2% or whole milk. This will also help with fat value that has plummeted this year.

Still, the majority of government food box purchases continue to be cheese, and the markets responded last week as spot cheddar rallied back above $2.

CME spot cheese pushes higher — past $2/lb, butter and powder steady-ish

Cheese markets gained more than a dime in CME spot trade on Wed., Sept. 2 with 40 lb blocks pegged at $1.91/lb. From there, the market continued to move higher at $2.12 by Friday, Sept. 4, up 30 cents from the previous Friday with zero loads trading; 500-lb barrels were pegged at $1.70/lb, up 27 cents with a single load trading.

Spot butter managed to gain through midweek before losing some of that advance at the end of the week. On Friday, Sept. 4, a whopping 12 loads were traded on the CME spot market with the price pegged at $1.4925/lb — up a nickel from the previous Friday. Nonfat dry milk on the CME spot market gained a penny at 1.03/lb with 6 loads trading Friday.

Milk futures are improving again, divergence continues

Class III and IV milk futures for the next 12 months came a bit closer together, on average, but the fourth quarter 2020 contracts are still divergent as Class III milk futures rallied Wednesday while Class IV was stagnant through yearend.

Trade on Sept. 4 closed with the September Class III contract up $1.37 from previous week at $17.06, October up $1.27 at $18.89, November up 21 cents at $17.55, and December down 12 cents at $16.65. On Friday, Sept. 4, the next 12 months averaged $16.82.

Conversely, yearend Class IV futures closed with the September Class IV contract down 14 cents from a week ago at $12.82, October down a penny at $13.86, November down a dime at $14.39, and December down 9 cents at $14.69. The next 12 months (Sept. 2020 through Aug. 2021) averaged $15.03 on Sept. 4.

The average spread between III and IV over the next 12 months was $1.79/cwt.

Imports/export factors affect storage, which in turn affects markets

The USDA Cold Storage Report released at the end of August showed butter stocks at the end of July were up 3% compared with June and 13% above year ago. Total natural cheese stocks were 2% less than June and up only 2% from a year ago. Bear these numbers in mind as we look at exports and imports.

According to the U.S. Dairy Export Council (USDEC), total export volume is up 16% over year ago year-to-date – January through July – and July, alone, was up 22% over year ago. Half of the 7-month export volume was skim milk powder to Southeast Asia.  January through July export value is 14% above year ago.

However, butterfat exports are down 5% year-to-date. The big butter export number for July was not enough to make up for the cumulative decline over the previous 6 months.

On the import side, the difference between cheese and butter is stark. Cheese imports are down 10% below year ago, but the U.S. imported 13% more butter in the first 7 months of 2020 compared with a year ago.

When butterfat and butteroil as well as butter substitutes containing more than 45% butterfat are included in the total, the volume of imports is 14% higher than a year ago with the largest increases over year ago seen from March through June at the height of the pandemic when retail butter sales were 46% greater than year ago.

Looking at these butter imports another way, is it any wonder butter stocks are accumulating in cold storage to levels 13% above year ago at the end of July — putting a big damper on butter prices and therefore Class IV? The U.S. imported 13% more butter and 14% more butter and butterfat combined, plus exported 5% less butter and butterfat year to date.

As accumulating supplies pressured butter prices lower, the U.S. became the low price producer and exported a whopping 80% more butter in July compared with a year ago. This was the first year over year increase in butter exports in 17 months. Still, the record is clear, year-to-date butter exports remain 30% below year ago and total butterfat exports are down 5% year-to-date.

Experts suggest that butter and butterfat imports are higher because U.S. consumer demand for butterfat has been consistently higher even before the impact of the Coronavirus pandemic stimulated a run on butter at stores for at-home cooking and baking. This seems to be a difficult reasoning to justify — given there is 13% more butter currently stockpiled in cold storage vs. year ago.

If 14% more butter and butterfat are being imported, does this mean we need to import to serve consumer retail demand and keep larger inventory to serve that retail demand? If so, why is the inventory considered so bearish as to hold prices back so far as to amplify the Class III and IV divergence? Does month to month cold storage inventory represent excess or simply a difference in how inventory is managed in today’s times, where companies are not as willing to do “just in time” and “hand to mouth” — after having dealt with empty butter cases and limits on consumer purchases at the height of the pandemic shut down.

The trade has not sorted out the answers to these questions.

Meanwhile, these export, import, and government purchase factors impact the inventory levels of Class III and IV products very differently — and we see as a result the wide divergence between Class III and IV prices and between fat and protein component value.

Interestingly, USDA Dairy Programs in an email response about negative PPDs that have contributed to the wide range in “All-Milk” prices, says the higher value of components “is still in the marketplace” even if All-Milk and mailbox price calculations do not fully reflect it across more than half of the country.

— By Sherry Bunting

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New risk management challenges (Part 2); DRP questions raised in divergent market

By Sherry Bunting, Farmshine, August 14, 2020

BROWNSTOWN, Pa. — For dairy producers managing their market risk, current divergent dairy classes are a problem. Those with Dairy Revenue Protection (DRP) policies in the second quarter of 2020 (April through June) saw the sudden, singular and dramatic rise in Class III — and the negative PPD’s that showed how much of that higher price did not make it into their milk checks — evaporate their DRP claims just the same.

Professionals speaking off the record explain that when Class III milk dropped down to $12 to $13 in April and May, it looked like Class III DRP policies would have “enormous losses” and corresponding claims. But then June hit, and those coverages were wiped out because the policy price, in this case the higher Class III, was averaged over the three months of the policy quarter – even if the policyholder never saw that Class III price in their actual milk check.

DRP policies are purchased to protect a milk price floor on a quarterly, not monthly, basis.

For those producers locking in a price floor with Class IV DRP policies, or a combination of III and IV, high payouts on Class IV policies were realized. In those cases, the DRP offered some coverage and even helped some producers cover at least a portion of big losses in their Class III futures market hedges.

Digging into the complexities, the real crux of the problem is that the movement of the Class III futures market and the USDA-announced Class III price do not reflect the milk check realities of most producers who purchased these risk management policies. That’s a problem.

We’ve all heard the line: “You don’t buy insurance hoping your house will burn down.” This analogy does not apply today. There was a fire, but the market indicators on most types of policies do not recognize the damage.

Professionals who sell DRP indicate they have looked at milk settlement sheets from clients. They have seen all the PPDs for June, and they understand the shortfall projections that could be made worse by massive de-pooling for July milk. They have seen the market realities for their customers.

“What kind of risk management is this if it doesn’t account for how their milk is actually priced?” asks one professional. 

In fact, several noted their belief that the USDA and Farm Bureau should look at these disparities, that if PPD is part of the mailbox milk price — as it is actually paid to farmers — then it should be accounted for in the DRP.

One concern shared in several Farmshine interviews is that ag lenders and some feed companies are urging customers to manage risk with DRP to protect their cash flow.

This is hard to do right now as the premiums to purchase DRP have skyrocketed due to the current level of volatility. This is further complicated, say insurers, by the way the Federal Order Milk Marketing system has failed to facilitate the transfer of “value in the marketplace” (according to USDA) to farmers who produced the milk.

In the very time when risk management is most essential, seeing coverages evaporate because the market did not translate value to reality is a double-whammy for those who paid to manage their risk.

Outcomes were also negatively affected for producers who based their DRP policies on components because those PPD levels are reflective of the significant discount between what farmers were paid for their components as compared with how the market valued those components — what USDA states is “value in the marketplace.”

American Farm Bureau Federation’s John Newton explains that, “In multiple component pricing Orders, proceeds from the pool are based on the difference between the classified value of the milk and the component value of the milk — which is effectively the Class III price. When the component value exceeds the classified value, the proceeds from the pool are negative and result in a negative producer price differential (PPD).”

The loss reflected by these PPDs was evident in the performance of second quarter DRP policies based on components. At one point in time, producers saw they had an indemnity coming to cover their milk check losses, the money they expected not to be paid for components because of the market downturn. But then that indemnity evaporated as June components settled higher, wiping out market losses in April and May and simply ignoring milk check losses for June when “the market” failed to pass along the higher component values to most producers in most of the U.S.

Results also varied from farm to farm, depending upon what point in time they purchased their component-based policies. Some component policies for second quarter 2020 paid something. Others did not pay much, if anything, based almost entirely upon what day a producer purchased the policy. In short, these policies did not perform as expected because the cash price paid to producers did not perform according to the “market”. 

Another concern shared is farms facing sudden quotas, with little advance planning. Some cooperatives paid their co-op blend price only on 85% of a producer member’s March 2020 level of production for May, June, July, and until further notice. While DRP allows production to be 85% of the insured amount, a producer’s coverage, in many cases, can be negatively affected by what USDA reports as production change for a state or region.

In first quarter 2020 (January through March), for example, Pennsylvania’s higher production almost wiped out some claims.

In figuring milk production by state, USDA NASS looks at Federal Milk Marketing Order pool summaries as part of the production calculation, along with farm surveys. This can be problematic in a time when milk moves farther and more erratically due to supply-chain impacts, volatile futures markets and incentive to de-pool.

If production shows a decline for a producer’s state or region, it can help a claim, and if it shows an increase, this can reduce or eliminate a claim — even if that producer with that policy actually made less milk, not more.

Livestock Gross Margin (LGM), another risk management tool that is available through USDA Risk Management Agency, is seldom used today due to limits on available funding. This product is also affected by the difference between Class III and Class IV in how LGM policies reflect the settlement price, the actual milk income losses.

Newton at Farm Bureau writes that the price risk associated with PPD can only be managed through the terms of a forward contract. The PPD is not “exchange traded” so the risk in this portion of milk pricing is not covered. 

Furthermore, according to Newton, DRP and LGM are federal crop insurance policies based on the announced USDA prices, which does not include the PPD because this difference between class and component value and the de-pooling risk that affects it is not a publicly-traded instrument.

While producers report some coverage from DRP by locking in a milk price floor using Class IV, especially at a point in time when Class IV was higher than Class III, this has not been the case when III is higher than IV.

Since DRP is a program that changes each year with some new elements having been implemented to it so far, those working with the program have a variety of suggestions for USDA and Farm Bureau to look at making it a better and more usable product for dairy producers:

1)      Address the PPD risk – something should be done about this if it is part of how mailbox milk prices are calculated to producers.

2)      Look at making the policies monthly instead of quarterly to reduce the risk of uncovered losses to policyholders and to get them paid sooner.

3)      Increase the highest level of coverage to 98 or 99% instead of 95%. A 5% deductible in this market makes DRP unaffordable. For example, at current premium levels, a Class III price of $17.09, insured at 95%, comes out to $16.24 floor. Already this means there is an 85-cent deduction, on average. At a much higher current premium cost of 43 cents, that’s $1.28 to $1.30 before the producer collects anything on a 3-month average. So the combination of production percentage and higher premiums makes for a large deductibl

In short, the problem right now with dairy risk management through federal crop insurance tools and futures markets is the policies and programs and “markets” have so many nuances that are juxtaposed with a Federal Milk Marketing Order system that is inconsistent, not transparent and full of loopholes.

Simplifying both would be helpful, some say. For example, what if insurance products had one sales period and one price discovery period each month to set the deal instead of so many chances to pick the wrong times?

As one professional explained, “If part of the problem is the pricing model, then we can’t throw risk management at that problem… We need to fix the root of the problem. This is not like home-owner’s insurance. There are a lot of factors that go into this.”

When producers pay for risk management, then suffer a loss, but have no or little indemnity because the market indicators say the milk was worth more than what was paid… it’s like having home owner’s insurance when a tornado hits. Your agent looks at your flattened house (milk price settlement sheet), but then has to say he or she is sorry, the adjuster looked at your neighbor’s house as the indicator for tornado damage to your house and his house is still standing.

Dairy farmers are encouraged to learn about DRP, understand it, and decide what application it has to their business in a multi-faceted approach to risk management. Some agents handling the product are not even advertising it because of the current premium cost and these unreconciled “market” issues.

As with any risk management tool, there are critical factors to consider:

1)      Know your cost of production,

2)      Know your operation’s risk tolerance,

3)      Work with an advisor you trust, who understands the tools and communicates with you about them,

4)      Consider a blended approach, don’t look at Class III as ‘the market’,

5)      Have others in the business to talk to as a sounding board,

6)      Take a long-term approach, don’t look just at the short-term,

7)      Learn all you can to understand how these tools perform in relation to how your milk price is calculated in your milk market.

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Deep discounts on All-Milk prices bring new risk management challenges

NOTE: In the first part of this three-part series, we’ll look at some of the factors contributing to the huge divergence between Class III and IV at the root of current losses in milk income, especially for risk-managers who were caught off guard with no good tools to manage the misalignment and especially the de-pooling. In the next two parts, we’ll look at some of the advice for managing basis risk in CME-based tools and revenue insurance.

IMG-9043

This graph at dairymarkets.org shows the divergence between Class III and IV milk futures at the root of deep discounts in All-Milk prices as compared with Class III.

By Sherry Bunting, Farmshine, Friday, August 7, 2020

BROWNSTOWN, Pa. — Dairy producers find themselves in uncharted territory, where a mixed bag of market factors, pricing structures, class price misalignments, Federal Milk Marketing Order (FMMO) provisions, product-in / product-out flows via imports and exports vs. inventory, as well as the government’s thumbprint on the scales in a pandemic shutdown of the economy and the dairy product purchases that followed. All have affected Class III and Class IV milk prices quite differently, creating deep discounts in blended farm milk prices vs. Class III.

“We’re seeing milk class wars,” said economist Dan Basse of AgResource Company, a domestic and international agricultural research firm located in Chicago, during a PDPW Dairy Signal webinar recently. Basse opined that the current four-class FMMO system is old and outdated with pitfalls creating new volatility issues for producers in the form of the $7 to $10 spread between Class III and Class IV in June / July.

He noted, as have others in the past, that a simpler pricing system with one manufacturing milk price and one fluid milk price is something that “dairy farmers could live within.”

Under the current four-class system, and the new way of calculating the Class I Mover via averaging, dairy farmers now find themselves “living on the edge, not knowing what the PPD (Producer Price Differential) will be,” said Basse.

“A $7.00 per hundredweight discount is a lot of capital, a lot of income and a lot of margin to lose with no way to hedge for it, no way to protect it, when the losses are not being made up at home (as reflected in) the PPD,” Basse related.

Previous Farmshine articles over the past few weeks have explained some of the FMMO factors reflected in the negative PPDs everyone is focused on because they are so large. While June’s PPD was primarily affected by lag-time, the next several months of negative PPDs are likely to occur based on the legislated change to the Class I Mover calculation in the last Farm Bill.

The significance of the PPD is that it indicates to the producer the value of the milk in FMMO-available pool dollars as compared to the announced Class III price. The PPD is how the FMMO pool revenue is balanced.

Normally, component values are paid by class, and the extra is divided by hundredweights in the pool to calculate a PPD reflected as the difference (usually positive) between the FMMO uniform price and the Class III price, according to Dr. Mark Stephenson, University of Wisconsin dairy economist in a recent PDPW Dairy Signal.

When higher-value Class III milk is de-pooled in this scenario, the dollars don’t stretch, so the pool has to be balanced by dividing the loss (negative PPD). Even in the southern FMMOs based on fat/skim the same shortfall occurs and shows up as milk being worth less than Class III, instead of more.

The problem faced right now is the Class III price does not represent the broader industry, and there are no straightforward tools for managing this type of risk, especially when the higher-value Class III milk is de-pooled or replaced with a lower class.

“It’s a terrible situation on the hedging side, with three material sources of the problem,” notes Bill Curley of Blimling and Associates in a Farmshine interview this week.

While he describes ways to manage some of these sources in building a risk management price or margin, such as using a mix of Class III and IV and other strategies that reflect a producer’s milk market blend of classes, “there’s no hedge for de-pooling,” he relates.

In fact, Stephenson illustrates this for the Upper Midwest FMMO 30, showing a difference of $7 between the level of negative PPD for July without de-pooling and the level of negative PPD with de-pooling.

While July de-pooling figures won’t be known until mid-August, the June de-pooling in the Northeast wasn’t as bad as in California, as an example. In California, so much milk is already sold outside the pool, that it is easy to replace virtually all of the Class III milk with lower-value Class IV in this divergent classified price scenario.

In the Upper Midwest, only so much de-pooling can occur due to qualifying criteria, so utilization that may normally be 75% Class III, was 50% in June. They don’t have enough Class IV to simply replace Class III and stay qualified on the Order.

Curley and others explain that this situation could leave producers unprotected, especially since they can’t control any of the sources of misalignment between their All-Milk price and Class III. The only factor they can control is whether or not to drop the hedges, which then leaves them unprotected for market risk at a volatile time in the midst of a pandemic as virus rates are reportedly re-surging.

Meanwhile, this week began with risk working its way back into markets as three consecutive days of steep losses in CME cheese and butter prices pushed both Class III and IV milk futures lower, but still with a $4 to $7 gap between them in the next few months.

For its part in balancing broader industry demand, USDA announced a third round of food box purchases for September and October, which will again include cheese, but this time will include more from Class II (sour cream, yogurt, cream cheese) as well as some butter from Class IV. All told, the government will have spent about $1 billion in three phases of dairy purchases for the Farmers to Families Food Box program.

Stephenson reminds producers of the silver lining in this cloud.

“Remember what the pandemic economy looked like just a little over two months ago,” he said. “It was absolutely devastating. Cheese was at $1.00/lb, and milk dumping was unprecedented.

“Now, as we look at things, it’s going to be better than we expected then,” he said showing the All-Milk price for 2020 is now forecast to come in at just under $18 for the year, but that many farms will net $20 per hundredweight for the year via the combination of Dairy Margin Coverage (DMC) and Coronavirus Food Assistance Program (CFAP) payments.

He estimates 2020 DMC payments at the $9.50 coverage level should net 66 cents across annual production for the year while CFAP payments have produced, so far, an impact equal to $1.55 per hundredweight across annual production.

For many producers, however, it won’t feel like $20. It might not even feel like $18.

Agricultural Prices 07/31/2020

USDA NASS reported June All-Milk prices last Friday, July 31. The range from high to low is $8, nearly double the normal range. At $18.10, the U.S. average All-Milk price did push the Dairy Margin Coverage milk margin above the highest payout level at $9.99.

Take June milk checks for example. USDA announced Friday, July 31 that the June U.S. All-Milk price was $18.10. That’s almost $3 below the Class III price of $21.04 for June, something we just don’t see.

Worse, USDA’s own report showed an $8.00 per hundredweight spread between the lowest All-Milk price reported at $14.80 for Michigan and the highest reported at $22.70 for South Dakota. This unprecedented spread is almost double the normal range from top to bottom. (Table 1)

Also unprecedented is the Pennsylvania All-Milk price reported by USDA for June at $16.30. That’s a whopping $1.80 below the U.S. All-Milk price when normally the state’s All-Milk price is 30 to 60 cents above the U.S. average.

The same thing can be said for Southeast fluid markets and other regions where a mixed products, classes and de-pooling of higher-value milk left coffers lacking for producer payment in the pool, and results varied in how co-ops and handlers  compensated producers outside the pool.

Dairy producers participating in the June milk check survey announced in Farmshine a few weeks ago, have reported gross pay prices that averaged fully $2 below the respective USDA All-Milk prices calculated for their state or region. Net prices, after deductions, averaged $4 below, and the same wide $8 spread from top to bottom averages was seen in this data from over 150 producers across six of the 11 Federal Orders. (Table 2)

This all creates an additional wrinkle in terms of the impact on the DMC margin, which was announced this week at $9.99 for June – 49 cents over the highest coverage level of $9.50 in the DMC program. This margin does not reflect anything close to reality on most farms in June and potentially July.

Large, unexpected and unprotected revenue gap

Normally the All Milk price is higher than Class III, and the cost of managing risk when the market moves higher is then covered by the performance of the cash price, or milk check, instead of the hedge, forward contract or revenue insurance. The inverse relationship in June and July between blend prices and Class III price, left a large, unexpected and unprotected revenue gap.

For its part, USDA AMS Dairy Programs defines the All Milk price in an email response recently as “a measurement of what plants paid the non-members and cooperatives for milk delivered to the plant before deduction for hauling, and this includes quality, quantity and other premiums and is at test. The NASS price should include the amount paid for the ‘not pooled milk.’”

USDA’s response to our query further confirmed that, “The Class III money still exists in the marketplace. It is just that manufacturing handlers are not required to share that money through the regulated pool.”

MilkCheckSurvey080320

By the looks of the milk check data from many areas (Table 2), most of this value was not shared back to producers, with a few notable exceptions. However, economists project the situation for July milk will be worse in this regard.

The factors depressing June and July FMMO uniform prices, USDA All-Milk prices and producer mailbox milk check prices are three-fold: the 6 to 8-week lag-time in advance-pricing of the Class I Mover, the new method of averaging to calculate the Class I Mover, and de-pooling of the higher-value Class III milk. All three factors are rooted in the $7 to $10 divergence between Class III and IV in June and July.

The part of the equation attributed to the new Class I Mover calculation is perhaps most discouraging because this is not money producers will eventually see. On the other hand, the lost value from the advance-pricing lag-time is eventually “caught up” in future milk checks. Most of the discount to come in July farm-level prices and negative PPDs in future months vs. Class III will be from the divergent factors that are not reconciled later.

Demand drivers differ for Class III vs. IV

Driving Class III $7 to $10 above Class IV was the abrupt turnaround in the cheese market, fed by strong retail demand, the resupply of foodservice channels, a significant May rebound in exports of cheese and whey, significant declines in cheese imports in the March through June period, and new government purchases of cheese for immediate distribution under CFAP.

On the flipside, Class IV value weakened at the same time as butter and powder did not have as many competing demand drivers. Additionally, butter stocks were overhanging the market, despite butter being the dairy product that saw the very highest increase in retail demand during the March through June Coronavirus shutdown period with retail butter sales up 46% over year ago.

Butter and powder production in the U.S. are mainly through co-op owned and managed facilities, while cheese production is a mix of co-op, private and mixed plant ownership.

When co-ops petitioned USDA for a temporary Class I floor hearing, most of the pushback came from the Midwest, and there were calls instead for government direct payments and cheese purchases for distribution to bring down what had been a growing cheese inventory. A stabilizer, or “snubber” on the Class I Mover calculation would have helped avoid much of this unrecouped discount on All-Milk price compared with Class III that affected most of the country.

While cheese moved to retail, foodservice, government purchases and export, butter was mainly relying on the surge in retail sales. Butter and milk powder were not draws in government CFAP purchases.

Overall, however, CFAP has not been the biggest driver in the cheese rally, according to Stephenson, although it added another demand driver to the Class III mix.

He notes that while the government CFAP purchases included a lot of cheese, those purchases accounted for 10% of the cheese price rally in June and July. The rest was fueled by retail demand staying strong and restaurants reopening and refilling supply chains, along with strong demand for other dairy products at retail, such as fluid milk. Producers were also pulling back to avoid overbase penalties. These factors combined to reduce cheese production in May and June, while demand drivers reduced inventory vs. demand.

Other dairy products also saw higher retail demand and were included to some degree in the USDA’s CFAP purchases, but without the same level of visible pull for the trade.

Import/export and inventory equation differs for Class III vs. IV

In taking a closer look at imports and exports relative to inventory to gauge differences between the product mix for Class III vs. Class IV, there are some key differences on both sides of that equation.

Exports of cheese in May were up 8%, and whey exports up 16% over year ago, according to U.S. Dairy Export Council.

Meanwhile butter and butterfat exports were down 7% in May, and down 21% below year ago year-to-date.

Powder exports did break records up 24% for May on skim milk powder. Whole milk powder exports were up 83% in May and 44% year-to-date.

On the import side of the equation, cheese imports were down 13% in the March through June period vs. year ago, according to USDA’s Dairy Import License Circular.

Non-cheese imports, on the other hand, were up 37% above year ago at the same time.

One factor hanging over Class IV markets is the butter inventory — up 11% over year ago — despite significant draw-down month-to-month and retail sales volume being almost 50% higher than a year ago throughout the Covid period.

While U.S. dairy imports are dwarfed in volume by U.S. exports, overall, it is notable that the 37% increase in non-cheese imports included 17% more butter and butter substitute imported compared with a year ago during the March through June period and up 28% year-to-date. Furthermore, whole milk powder imports were up by 25% in the March through June period.

Looking ahead

In a dairy market outlook recently, both Stephenson and professor emeritus Bob Cropp said these wide swings that are creating deep discounts are expected to begin moving toward more normal pricing relationships after August, with Class III and IV prices both forecast to be in the $16s by the end of the year, and in the $16s and $17s for 2021.

Already this week, CME cheese has slipped below the $2 mark, pushing August Class III futures under the $20 mark and September into the mid-to-high $16s. Spot butter tumbled to $1.50/lb, pushing Class IV futures down into the low $13s — keeping the divergence between Class III and IV in place.

Experts encourage producers to be thinking more holistically about the milk markets in planning risk management and not to look at Class III as the leading indicator of which direction the market will take.

This makes any discussion of “margin” based on a Class III milk price irrelevant to the reality under the present conditions. In short, risk management tools did what they were designed to do, but new challenges on the cash price, or milk check side, will change how producers implement and use these tools, or blends of tools, in the future.

“Class III might be a wonderful market for cheese, but it’s not reflecting the entire dairy industry. Risk managers are losing margin on contracts that were meant to protect them from market risk,” says Basse.

“We normally trade at an All-Milk premium to the CME Class III. Today, that has changed dramatically,” he adds. “We are at a significant discount to the CME. We just don’t see these discounts relative to the CME. It is unprecedented.”

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