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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Understanding these negative PPDs, massive depooling; ‘New’ Class I calculation doubles the rub

 

Microsoft Word - DMAP IL20-3.docx

Large negative PPDs, Class III depooling and buyers reblending the milk price paid to farmers in June and July could be with us through August and even September because of how wide the divergence is between the Class III and Class IV prices, based on what the CME futures markets are showing. This divergence lowers all other classes in the pool (I, II and IV), especially now with the new “averaging” method of calculating each month’s Class I Mover in effect since May of 2019.

By Sherry Bunting, Farmshine, July 3, 2020

BROWNSTOWN, Pa. – Dairy producers seek to understand record-large negative PPDs (Producer Price Differentials) for June milk, meaning the the significant gains made in cheese markets and and Class III milk price are not making it to milk checks, especially for Federal Milk Marketing Orders (FMMOs) that are not predominantly cheese markets. (See FMMO data here

The extent of these negative PPDs – ranging from -$3.00 to -$8.00 per hundredweight (cwt) – has several factors, including the new way the Class I Mover is calculated since the 2018 Farm Bill changed it from the “higher of” Class III or IV pricing factors to an average of the two with an arbitrary 74-cent add-on. (See related July 28 story on revealing milk check data here)

“Expect historically large negative PPDs in Multiple Component markets for June and July,” writes Calvin Covington, retired breed association executive secretary and milk cooperative CEO, in an email interview with Farmshine this week.

He also estimates the volume of milk depooled in June will set a record (it did), further limiting how much of the past six weeks of higher dairy product prices will even make it into their milk checks.

Covington confirms Class III milk was already being depooled in May. As reported in last week’s Farmshine, we calculated the volume of milk pooled across all Federal Orders in May was already 13% below year ago levels.  For June, the depooling volume will be much more significant, in fact it is likely to be enormous.

“There is little economical reason to pool any Class III milk in June,” Covington asserts. “The only Class III milk that will be pooled in June is Class III milk going to a pool plant, and to meet any requirements to keep milk pooled in July.”

In fact, if buyers pooled Class III milk on Federal Orders in June, they would have to write a check to the settlement fund (instead of taking a draw from the fund as they do in normal conditions when the Class I bottlers are writing that check).

This is because the Class III price for June was announced this week at $21.04 – nearly $10 per cwt higher than the Class I Mover for June, which was set at $11.42 back in the beginning of May. The June Class I Mover is the lowest since the Great Recession while the June Class III price is the highest since 2014 — both now occurring in the same pooling month!

The reasons for the steep negative PPDs producers in Multiple Component Pricing (MCP) FMMOs will see for June milk, says Covington, are the high Class III price ($21.04) vs. Class IV ($12.90) and Class II ($12.99), the Class I Mover advanced pricing lag at $11.42, and the new method of calculating the Class I Mover, especially for July.

“In skim-butterfat priced markets – the Southeast Orders – blend prices will be lower than the Class III price,” Covington adds.

He explains that the PPD is paid on a hundredweight (cwt) basis, and it impacts all milk the same regardless of milk components.

“High component herds, especially in Multiple Component markets, see larger variation in milk prices,” Covington explains. “It is all due to arithmetic. Milk is paid on fat and protein. The more fat and protein in the milk, the greater the price change when fat and protein prices change.”

Covington spoke at World Dairy Expo last fall about the makeup of the milk check, and all of the factors that go into it. He reminds producers that only regulated plants are required to pay minimum class prices. Unregulated non-Class I plants choose to be associated with the pool so they can draw from it to pay a blend price to their farmers.

Now that the price for milk used to make cheese is so much higher than the price for milk used as a beverage or to make yogurt, ice cream, dips, butter, powder and all other products —  cheese plants are free to disassociate themselves from the FMMO pool, and there is no regulation stating they must pay their producers even the minimum announced Class III price for components.

Under the current system, when the Class III price rises quickly to overshadow the previously-set Class I Mover, there’s no reason for those Class III plants to pool the milk, unless they want to remain “qualified” to participate in the pool (draw) in the following month.

Covington observes that the upside-down pricing and negative PPDs will be with us at least through July. Dairy economists Mark Stephenson, University of Wisconsin and Andrew Novakovic, Cornell, noted in a recent Dairy Markets and Policy brief that this situation of negative PPDs, Class III depooling and buyers reblending the price paid to farmers could be with us through August and even September because of how wide the divergence is between the Class III and Class IV price via the CME futures markets.

This divergence lowers all other classes in the pool (I, II and IV), especially now with the new “averaging” method of calculating each month’s Class I Mover in effect since May of 2019.

Covington notes that it all boils down to math. The PPD is simply the difference between a Federal Order’s revenue available for producer payment (Class I, II, III and IV combined), minus the payment to producers at the Class III price based on components.

When Class III components are higher than the available revenue in the pool, the PPD is negative. When the Class III milk is depooled in that scenario, the funds aren’t there to pay the value.

“Factors impacting the size of the PPD, positive or negative,” he says, “are Class III price relative to the other class prices, volume of Class III milk pooled and an Order’s Class I price and usage.”

The primary factor in June’s negative PPDs is the extreme rapid increase in the Class III milk price. The rising cheese markets and Class III milk futures were mostly translated into the June Class III price because it was based on four weeks of June cheese sales.

The Class I Mover, on the other hand, was calculated six weeks earlier based on what the trade was doing at the end of April and beginning of May.

In the Covid-19 market-disrupted environment this is like two different world’s colliding based on timing and calculations.

Add to this the fact that Class IV and Class II prices saw muted increases during June compared to Class III’s large and abrupt increase, and what we are left with is the scenario where Class III beats all other classes by $7 to $10 in the same pooling month.

FMMOs with larger utilization of Classes I, II and IV will not see much boost from the uptrending cheese markets in their June blend price.

FMMO’s with large Class III utilization would see that boost. But depooling, reblending and assessments will all play further roles in how even those mailbox milk checks look once June milk is paid for.

Negative PPDs are not new. Dairy producers have experienced negative PPDs on milk checks in the past. Seeing a negative number in an uptrending milk market always brings questions and frustration. In fact, the November 2019 through January 2020 period in several of the past five years produced negative PPDs.

Last November, for example, the seven Multiple Component Pricing FMMOs saw a negative PPD averaging -$2 and ranging from just under -$1 to over -$3.

That pales in comparison to the negative PPDs producers will see for June, July and potentially August or September of 2020. Expect to see PPDs that are double, even triple, what was seen last November.

By now, most dairy farmers understand that a rapidly rising cheese market and corresponding Class III milk price presents the key factor putting PPDs into negative territory. When this happens, producers are reminded that a rising Class III milk price is still a positive development because it indicates milk markets are improving.

But in what some are calling a “whipsaw market” where prices turn abruptly in unexpected directions due to an unforeseen disruption like Covid-19, it’s useful to look at the other factors, for the long term.

First, when Class III milk’s component value is higher than the value of all the classes combined, the result is a negative PPD because after the Class III component values are paid, there is nothing left in the pool for the PPD draw. When the Class III milk is depooled, then that value is not available either.

When the blend price is higher than the Class III price, which is the norm, those Class III plants take a draw. When the reverse is true, they would technically owe the pool.

What sets this up against a huge market-disrupting event like Covid-19 is the lag-time between the calculation of the Class I Mover based on two weeks of trade and calculated six weeks in advance compared with the calculation of the manufacturing class prices based on the current month’s market conditions weighted over four weeks.

Even in those prices, there is a one to two week lag between what happens on the CME daily spot market and its translation to the weekly USDA National Dairy Product Sales Report, on which the class and component prices are based. There is no daily reporting of actual trade, actual sales of the four main dairy commodities, just weekly surveys that are published the following week.

On the flip-side, for April, the Class I Mover was set at $16.64 based on market conditions (advance pricing factors) during the first two weeks of March, before the Covid-shutdown. The Class III price came to $13.07 for April based on the economic shutdown affecting foodservice demand while retailers had a tough time keeping dairy products in stock.

With Class I sales rising dramatically in April, and the Class I Mover sitting $3.57 higher than Class III and $5.24 higher than Class IV – there was incentive to pool everything, even the displaced milk as the industry adjusted to an unforeseeable event and the Class I Mover stood well above all other classes, especially the dumped milk that was pooled at Class IV value.

Thus, April set a record the amount of ‘other use / dumpage’ milk as 350 million pounds of displaced milk was pooled at the lowest class price across all FMMOs, nearly 10-times the amount that is normally pooled as ‘other use / dumpage’.

Now, that lag-time produces an opposite situation for June and July, and there is another wrinkle in the FMMO fabric – the new method for calculating the Class I Mover doubles the rub.

As a result of changes made in the 2018 Farm Bill, the Class I mover is now established by averaging Class III and Class IV and then adding 74 cents to that average. It used to be calculated using the higher of Class III or Class IV. In this case, that would have made a difference as Class III and IV have significantly diverged.

The calculation change for the Class I Mover was made to help processors hedge their future milk costs on the futures markets without having to guess which futures contract to use – Class III or IV. This was said to be something that would provide stability for Class I producers by stabilizing pricing for Class I processors. However, in these very unstable ‘whipsaw market’ times, the rub on producer milk checks will sting.

When it was proposed in 2017, American Farm Bureau Federation studied this method and documented little change to the net result for dairy producers when multiple years of pricing were averaged together and evaluated. In fact, when the new method went into place, there were several months where the average-plus-74-cents made the Class I Mover higher than it would have been under the old “higher of” method.

Not so in a volatile market with a time-lag involved.

These issues of negative PPD affect disproportionately the Federal Milk Marketing Orders (FMMOs) that have more Class I and IV utilization. FMMOs with small Class I utilization and large Class III utilization are relatively untouched as those blend prices would reflect mainly the much higher Class III cheese milk component value. But with depooling and reblending, those checks may also be impacted.

Looking ahead to July, the Class I Mover was already announced at $16.56, based on the advance pricing factors from the first two weeks of June. While July’s cheese trade is yet to be seen, the July Class III contract on the CME futures market stood at $22.85 at this writing on July 1st, which is $6.29 per cwt higher than the already set Class I Mover for July.

Even though the July Class I Mover stands $5.14 per cwt above the June Class I Mover, not even July’s Class I had the benefit of the full advance in June cheese trade because it was based on just the first two weeks of the June rally.

According to John Newton American Farm Bureau chief economist , there is currently, no mechanism to prevent negative PPDs. Newton writes in a recent ‘market intel’ piece:

“Historically, negative PPDs occur less than 15% of the time. Methods to prevent or mitigate negative PPDs  — such as eliminating the advanced pricing component, reconsidering the higher-of pricing formula (but with forward contracting of Class I milk), requiring mandatory pooling of milk in all Classes or consideration of decoupling the Class I milk from the price of manufactured milk products  – could be explored.”

UPDATE: Negative PPDs will be here for a while. Looking at these price spreads does not bode well for the continued inverted relationship between Class III and the Class I Mover — or what milk market analysts call “unorthodox pricing arrangements” — that will lead to continued negative PPDs and de-pooling of the higher Class III value milk from Federal Milk Marketing Order pools. In fact, the discussion of this issue has many twists and turns, a few questions have been forwarded to USDA Dairy Programs for some explanations, and June pooling data and blend price / PPD information is anticipated after the 14th.

Here’s the problem. Even when the ‘advanced pricing’ method gets caught up, the real problem is the way the Mover is now calculated. The 2018 Farm Bill made a huge change without a USDA administrative hearing and without a producer (bloc) vote.

Fluid milk processors wanted stability. They wanted to be able to forward-contract their milk costs and not have to deliberate over which futures contract to use — Class III or IV — since the Class I Mover used to be based on the “higher of” the two classes. Now, the futures markets are showing us that the spread between Class III and IV is going to be well above $1.48/cwt through November. That’s the significant number because the new Class I Mover method is calculated by averaging Class III and IV and adding 74 cents to that average. Once the III / IV spread hits $1.48/cwt, the 74 cents no
longer covers the difference.

Once we get to 2021, the spread narrows through those months, according to what the futures show now, but the Class III / IV spread looked reasonable and well within that $1.48/cwt for this current period back when viewed on the futures markets six months ago. If Congress can make a big change like this to Federal Order pricing formulas based on NMPF and IDFA agreeing on such while the Farm Bureau took a neutral position
— other than to review it and show it to be a wash when averaged over time — why can’t the Congress require a USDA National Hearing on milk pricing with Report to Congress?

Previous Farm Bills had such language, but the National Hearing “cost” was never funded. Now, the idea of a National Hearing on milk pricing, and a producer vote on Federal Orders, is seldom discussed. What we see from this Class I Mover example that a big changes can be made and implemented quite readily at the legislative level — no hearing or vote required — as long as the cooperative processors and proprietary processors agree on the change in advance. If milk is substantially depooled to keep higher end product values in hand, hopefully through the reblending process, plants and cooperatives will pay the marketplace value to dairy farmers, given the sacrifices producers have made to bring production into line with demand.

FYI: The Pennsylvania Milk Marketing Board (PMMB) successfully “decoupled” and stabilized the Class I milk price for two months by setting a Class I floor of $15 through the state’s over-order premium authority. The Federal Milk Marketing Orders were going to have a national hearing on this in April, but chose not to after economists and organizations in the Upper Midwest cheese region complained. The PMMB action was limited only to Pennsylvania, so for two months (the limit of the Order), when the Class I beverage milk price for milk produced, processed and sold in Pennsylvania fell below $15, the current over-order premium of around $1.00 per cwt was expanded automatically to bring the price back up to $15 for May-July 2020 for this very reason.

Trouble is, with the FMMOs not considering a similar move, this PA ‘premium’ only pertains to bottling plants paying milk suppliers for milk produced on PA farms (and they are free to take milk from other farms outside of PA). This price was built into the PA minimum retail milk price for May and June, but retailers, processors and cooperatives are not required to pass these state-mandated premium funds paid by PA consumers back to PA farms — unless the milk meets all three of these criteria: produced, processed and sold in Pennsylvania.

Author’s Opinion: There is one other thing worthy of consideration. A national hearing on milk pricing, period, to look at options, updates, simplification, transparency, daily reporting, producer voting, consolidation, transportation and deductions. Some grassroots groups have been asking for a national hearing with report to Congress for nearly 10 years as there is no other way for farmers to access the FMMO system run by market administrators, and they don’t even get a vote because cooperatives bloc-vote changes on behalf of their members. Previous Farm Bills included language for such a national hearing, but they were never conducted. At some point, the complexities at play here need to be evaluated from both regional and national perspectives in terms of “orderly marketing” and how farm viability and farm and food security in regions are affected and in terms of fulfilling the desire of many consumers wanting fresh, local milk.

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U.S. milk production falls 1% in May, FMMOs pool 13% less milk

OtherUsePooledMilk_Table_I(withMay2020) (1)

Table 1 showing “other use / milk dumpage” totals by Federal Order includes data for May 2020. The month of May saw 13% less milk pooled on Federal Orders compared with a year ago, and 13% less milk in the “other use / dumpage” category compared with a year ago — down dramatically from the enormous 350 million pounds of “other use” milk pooled in April 2020.

States east of Mississippi cut production, west mainly grow

By Sherry Bunting, Farmshine, June 26, 2020

WASHINGTON, D.C. — As April’s dismal Covid-impacted dairy market spilled into May milk checks, the supply-side of the ship turned in May at the same time as demand was strengthened by dairy donations, retail demand and food-service re-stocking.

USDA Dairy Market News reports each week have signaled progressively tighter milk supplies heading into summer vs. stable to strong demand pushing spot loads to sell above class price in some areas.

In April, cooperatives across the country set base limits on member milk production for May until further notice. Some severely discounted any milk provided that was above 80 to 90% of a member farm’s March marketings. Many producers chose to leave this penalty milk out of the tank.

As these co-op ‘base’ programs went into effect in May, the impact is demonstrated in the USDA May Milk Production report, estimating  U.S. output at 18.8 billion pounds, which is 1.1% below year ago for May.

Cow numbers were down 11,000 compared with April, according to USDA, but still 37,000 more milk cows were estimated on farms compared with a year ago.

Nationally, milk output per cow dropped by one pound/cow/day in May compared with a year ago, the report stated.

In addition, Federal Order milk pooling totals and “other use / dumpage” data provided to Farmshine by USDA AMS by request, showed the total volume of milk pooled across all Federal Orders in May dropped like a rock to levels 13% below year ago.

Similarly, the volume pooled as “other use / dumpage” across all Federal Orders fell to levels 13% below year ago nationwide — from the enormous 350 million pounds recorded in April to 36 million pounds in May. (See Table 1.)

What is eyebrow-raising is how the numbers in these reports geographically arrange themselves.

In last Thursday’s Monthly Milk Production Report, the national drop in total output for May masks the fact that among the 24 top milk producing states listed individually in the report, those east of the Mississippi accounted for all of the production decline – plus balancing the accelerated western growth to get the U.S. total a significant 1% below year ago.

States east of the Mississippi saw large decreases in production, while in contrast, the growth states of Texas, Colorado, Idaho, Kansas, Arizona, South Dakota saw increases in production ranging from 1.4 to 9.7% above year ago.

East of the Mississippi, the Northeast milkshed really clamped down on production with Pennsylvania 3% below year ago, New York down 3.7%, and Vermont down 6.4% vs. year ago in May.

Further south, Virginia and Florida were unchanged from a year ago, while Georgia’s production fell 1.4%.

In the Mideast and Midwest, Michigan was off a fraction (0.4%), Minnesota down 1.9% and Wisconsin’s production fell by 3.1% vs. year ago. Indiana, Illinois and Iowa were down 1.7 to 2%. Ohio was the outlier, gaining 0.4% in production over year ago.

In the West, May production was larger than a year ago with South Dakota leading on a percentage basis producing a whopping 9.7% more milk compared with a year ago. Number five Texas grew by 1.9%. Number three Idaho grew by 4.6%, and Colorado grew by 4.8%. Arizona grew by 1.4%, and Kansas by 2.4%.

Three western states were key outliers as California dropped production 1.5% below year ago, Utah was down 3%, and New Mexico fell a whopping 7.2% below year ago. The Pacific Northwest had generally steady production with Oregon unchanged from a year ago and Washington down fractionally.

In Federal Order pooling, the volume pooled nationwide was down a whopping 13% from 15.1 billion pounds in May of 2019 to 13.2 billion pounds this May of 2020.

In the Northeast, total pooled pounds on Federal Order One for April and May of 2020 were essentially equal at 2.3 billion pounds each, but relative to year ago, this was a decline of 1.7% while production on farms in the region fell a whopping 4%, collectively. The difference likely came from elsewhere.

Meanwhile, the amount pooled as “other use / dumpage” in the Northeast Order One dropped abruptly from the enormous 131 million pounds in April to 12.3 million pounds in May, representing a 35% drop in “other use / dumpage” compared with a year ago.

Pooled milk classified as “other use / dumpage” in the Appalachian, Florida and Southeast Orders 5, 6 and 7, also dropped significantly in May compared with April’s large records. In fact “other use” milk in those three Orders fell to levels that were 19% (Appalachian), 9% (Florida) and 32% (Southeast) below year ago. At the same time, total pooled pounds for these three Orders – 5, 6 and 7 – were calculate below year ago in May by 1% in Order 5 (Appalachian), 2.5% less in Order 6 (Florida) and a significant drop of 11.7% less milk pooled compared with a year ago in Order 7 (Southeast).

In a sense, the pull back in production in the Northeast, Mid-Atlantic and Southeast regions, where April’s dumping had been so extreme, helped bring down total pooled pounds in those areas to rein-in the “other use” pounds as well.

Growth areas of the nation showed significantly less “other use / dumpage” pounds in May vs. April. However, in some of the Orders, such as the Southwest (Order 126) and Upper Midwest (Order 30), the “other use / dumpage” category was still above year ago levels by a modest margin, according to the USDA AMS figures.

As the dairy industry right-sizes itself after COVID-19 supply-disruptions that abruptly cut 30 to 40% from producer milk checks, it remains to be seen how states east of the Mississippi can regain their footing as western growth areas kept shipping more milk right on through — without missing a beat.

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Industry, government follow grassroots donations lead, CFAP adds to dairy demand driving markets higher

By Sherry Bunting, Farmshine, June 26, 2020

WASHINGTON, D.C. – Government and industry dairy donations and record-setting CME cheese prices all got their starter fuel from grassroots dairy producers in what has become one of the good news stories of the COVID-19 era.

Today, USDA has systemized the donating through the Coronavirus Food Assistance Program (CFAP), and dairy processors, cooperatives and checkoff organizations have partnered with food banks and non-profits to extend the reach of efforts begun originally by generous dairy producers and their agribusiness partners supplying grateful consumers.

In April, when milk dumping was at its height, and stores had purchase-limits or sparse supplies of milk and dairy products, farmers and their agribusiness partners and communities went into immediate action. Examples of milk donation drive-through events began popping up in succession – just a fraction of them featured in the pages of Farmshine.

Also in April, farmer-funded Dairy Pricing Association (DPA) purchased 228,000 pounds of block cheddar, immediately moving the CME block cheese price from its $1/lb plummet to $1.20 (adding $1.00 to Class III milk values at the same time).

This DPA move, working with charities for distribution and a Midwest processor to turn their CME-style bulk purchase into consumer-packaged goods for donation, gave a green light to other cheese market participants. Within a week of that purchase and the initial 20-cent gain in blocks that followed, block cheese continued its climb to $1.80/lb, and the upward momentum has not stopped — fueled now by huge government purchases and food-service pipeline re-stocking.

On the heels of these grassroots efforts, dairy checkoff organizations began getting involved to work with their partners and “convene” the industry to do big donations in May.

Meanwhile, the U.S. Congress had passed the Coronavirus Food Assistance Program (CFAP) in April, with $3 billion of the $19 billion set aside for the Farmers to Families Food box purchases. But it was mid-May before USDA announced those first-round contract awards totaling $1.2 billion in fresh food — $317 million of it for fluid milk and dairy products – for distribution May 15 through June 30.

This week, USDA Secretary Sonny Perdue called the food box program a “trifecta, win-win-win”, pointing out how the program is getting farmers, processors and non-profits together to directly provide fresh food to people without burdening food banks with refrigerated inventory they aren’t prepared to handle.

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In April, when block cheddar was plummeting to $1.00/lb, the farmer-funded Dairy Pricing Association based in Wisconsin with member-contributors nationwide, purchased 228,000 pounds of block cheese to be cut-down for distribution by several charities. DPA Facebook photo

This was the model of grassroots groups and individuals on their own dime and time doing dairy donation drive-throughs, milk-drops, and whole milk gallon challenges from late March to the present. It was also the model of DPA, funded by voluntary dairy farmer milk check deductions, when DPA purchased the block cheese in April for cut-down and donation. Also in April, we saw the partnership initiated in Pennsylvania between 97 Milk and Blessings of Hope. They raised funds to buy local milk for donation to families in need.

As these grassroots efforts began having an impact, Midwest Dairy got approval from USDA in May to use checkoff funds to donate cheese, and UDIA of Michigan was allowed to provide minimal funding to food banks for “handling costs” associated with receiving cheese donated in May by DFA.

Now, with USDA systemizing that smart approach — started by grassroots efforts — the department stated in a news release that as of June 23, its CFAP Farmers to Families Food Box Program had delivered more than 20 million boxes of fresh food, including milk and dairy products, to families impacted by COVID-19.

The initial round of USDA CFAP contracts ends on June 30. But this week, USDA announced it will extend “well-performing” first-round contracts for similar amounts in a second-round from July 1 through August 31 to total an additional $1.16 billion.

The share of this second-round to be devoted to fluid milk and dairy purchases was not specified in the USDA announcement. One thing USDA did note is that even though most of the second-round dollars will be spent with “selected” current contract awardees, a few new contracts may be awarded to previous applicants that had been passed over due to technical errors or to provide boxes in areas identified as “underserved.”

Throughout the USDA CFAP food box delivery process, regional dairy checkoff organizations have been involved as “facilitators.”

Week after week, Farmshine has received press releases from dairy checkoff organizations, and there have been numerous social media posts, about the CFAP milk and dairy box donations. Regional checkoff organizations say they are working with processors, cooperatives and non-profits — in conjunction with the USDA CFAP food box program — and that area dairy farmers are involved as volunteers to hand out the boxes.

According to National Dairy Council president Barb O’Brien, dairy checkoff organizations began “convening the industry” before CFAP.

“We have leveraged the checkoff’s unique ability to convene companies from across the value chain to identify a number of ways to redistribute excess milk and other dairy products to families facing food insecurity,” writes O’Brien in an email response to Farmshine recently.

In a specific cheese example she had mentioned in a media call described as block cheese being purchased and cut into consumer size portions, our inquiry for details was met with this response:

“In response to lost food-service markets and dairy farmers being asked to dispose of milk, we’ve worked to connect coops to partners that donated processing capacity for any excess milk available for food banks,” O’Brien wrote. “Many other dairy companies — such as the example I gave from DFA of cheese donations in Michigan — provided massive quantities of dairy products to food banks before the USDA Farmers to Families Food Box Program was even put into place. Moving forward, it will be important that we continue working together as an industry to target the greatest needs and find long-term solutions to our nation’s hunger crisis.”

O’Brien cites DMI’s “long-time partner” Feeding America and other relationships with local food banks and pantries. Former Ag Secretary Tom Vilsack, now a top dairy checkoff executive with DMI, sits on the Feeding America board of directors.

O’Brien also noted in her response that dairy checkoff “counseled industry partners and others on how to direct dairy products toward the greatest needs.”

She reports that, “This widescale approach enabled us to pinpoint some of the biggest barriers in getting excess dairy products to hungry families during the pandemic” and to “rapidly initiate an industry response.”

As communities began doing their own grassroots efforts through the generosity of dairy farmers, agribusiness and individuals purchasing milk or contributing milk for dairy donations in the early days of the COVID-19 ‘stay-at-home’ orders, checkoff organizations took note and began to look at what they could do in terms of refrigeration equipment and setting up refrigeration trucks for industry and governmental efforts.

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Grassroots whole milk donation events like this one just outside of Lancaster, Pa. in May, have been providing whole nutrition to families across the state and region since the height of COVID-19 ‘stay-at-home’ orders in April.  Photo by Michelle Kunjappu

While many of the grassroots-organized milk donations were comprised of whole milk purchases vs. low-fat milk, this week marked the first time a checkoff news release showed red-cap whole milk gallons or even referenced whole milk in their facilitation of USDA CFAP box deliveries. This is another win led by early grassroots efforts.

ADA Northeast (ADANE), for example, indicated in a press release this week that 200,000 gallons of milk will have been handed out in the Northeast / Mid-Atlantic region by the time June Dairy Month ends. The release stated that 20,000 gallons would be donated this week, alone, from DFA, Upstate Niagara and Schneider’s Dairy to be given out in New York and Pennsylvania through the Nourish New York state funds and CFAP food box federal funds.

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For the first time among the many news releases sent by ADA Northeast (ADANE) touting checkoff ‘facilitation’ of fluid milk and dairy donations, whole milk is in the box! Here, dairy farmer Joel Riehlman of Fabius, N.Y., and a 4-H member, hand out whole milk in mid-June at a Nourish New York and USDA CFAP Farmers to Families Food Box donation drop in Syracuse. Photo provided by ADANE

In a recent Watertown, New York drop point for these donations, ADANE board member Peggy Murray of Murcrest Farm, Copenhagen, N.Y. volunteered, and she noted in the ADANE press release that, “It was heartwarming to see their gratitude – especially for the whole milk — and to know that people really want the products that we produce on the farm.”

This has been the experience of so many farmers and ag community members involved in the grassroots distributions, as well as the industry and governmental distributions, because each event affirms that consumers love milk and dairy products, especially whole milk, and that they want to support local farms — as evidenced by their comments and long car-lines of families eager to receive these products. In some cases, recipients gave money asking it be put toward more drive-through dairy events.

In the Southeast and Midwest, CFAP contract recipients Borden and Prairie Farms have also been visible this month with Dairy Alliance and Midwest Dairy checkoff organizations often as partners, along with several state dairy producer group members joining in as volunteers and location coordinators.

Overall, the CFAP food boxes have been well-received. The program was designed by USDA to give farmers and food providers a presence within their communities, working with local food banks and non-profits without creating inventory hardships. In this way, USDA has taken what local communities were doing at the grassroots level — on their own dime and time — and systemized it with federal funds and contracts.

While dairy’s share has not been specified in USDA’s announcement of the second round of $1.16 billion in fresh food purchases in the contract extensions through August 31, it is believed fluid milk and dairy purchases will be similar to the first-round total of $317 million because several non-profits indicate they will be supplied with all their milk and dairy needs through the USDA until at least August 31.

This includes Blessings of Hope, which had partnered with 97 Milk in April, and raised over $50,000 for purchasing and/or processing local milk for families they serve in Pennsylvania.

Farms in southeast and southcentral Pennsylvania that were wanting to donate “over-base” milk for this 97 Milk / Blessings of Hope program will have to wait until after August 31, when the USDA CFAP food box program is set to end. It is possible that the CFAP program may again be extended until all $3 billion in food box funds are exhausted.

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When Dairy Pricing Association (DPA) first ran an ad in the Cheese Reporter in early April looking for 200,000 pounds of USDA-graded cheddar cheese less than 30 days of age, the calls they received could not fill the order. By requesting USDA-graded cheese, the delay in their eventual purchase of 228,000 pounds showed a void in supplies that led to the initial turnaround in the plummeting block cheese price on the CME, which fueled the advances in manufacturing milk value. CME cheese prices drive Class III milk futures, which have risen rapidly since the DPA purchase bridged the gap in April. Current market strength has been extended through the large USDA food box program demand occurring at the same time as the re-opening of the food-service sector. DPA Facebook image

A positive outcome for farmers from all of these efforts — now extended by these large government purchases — is the real impact they are having in helping drive dairy markets higher since that first farmer-funded DPA purchase of block cheddar in April turned the CME away from its $1.00/lb record-low plummet.

Block cheese is traded every day around noon on the CME spot auction, and the price has set several new record-highs in June, including the most recent record-highs of $2.70/lb on Monday, June 22 and $2.81/lb on Tuesday, June 23.

This rally has pushed Class III milk futures into new contract highs for June, July, and August, while adding strength across the board.

In CME futures trading Monday (June 22) the June Class III milk contract hit $21, up $9 from the USDA-announced May Class III price of $12.14. July’s contract topped at $22.19, and August edged into the $20s. Monday’s Class III milk futures averaged $17.98 for the next 12 months, and Tuesday’s futures trading held most of that level, even adding to the July contract.

There is a supply side to this scenario also. See the related article on USDA milk statistics, pooling, production and dumping.

Trade sentiment is mixed on how long the upward momentum in dairy markets can last.

On the one hand, cheese prices are being driven by the combination of USDA CFAP purchases now continuing through August, re-stocking of food-service pipelines as the country re-opens, and the USDA Dairy Market News reports of consumer buying strength shown in strong pizza sales throughout the Covid period, and stable to strong retail sales meeting tighter supplies of milk and cream.

On the other hand, some experts warn of weakness ahead as these record-setting prices may prompt milk production expansion by fall when demand may wane after the USDA CFAP food box purchases end and food-service pipelines are re-stocked.

Much of the future will depend on how the re-opening of America goes for families, the food-service sector, schools, sports, and the economy at-large.

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Eye on markets as reined-in supply vs. strong demand drive dairy higher

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By Sherry Bunting

Trade sentiment is mixed on how long the upward momentum in dairy markets can last as producers wait for these higher levels to land in their milk checks.

On one hand, USDA Dairy Market News reports strong pizza sales, stable to strong retail sales, and government purchases all stoking demand against reined-in supply. On the other hand, some analysts see weakness ahead as higher prices may prompt milk expansion by fall when demand may wane after CFAP food box purchases end and food-service pipelines are re-stocked. Much will depend on how the economic re-opening goes for families and food-service, as well as what happens with schools and sports. Experts suggest producers evaluate their risk management tools while markets present positive margins in a tumultuous time.

To-date, the USDA Coronavirus Food Assistance Program (CFAP) Farmers to Families Food Box Program has delivered 18.5 million boxes. The first round of May 15-June 30 fresh food purchases totaled $1.2 billion, including $317 million for milk and dairy products. Now USDA is poised to announce a second round of $1.16 billion for July 15-Aug. 30, of which dairy’s share has not yet been specified.

Also, as of June 22, USDA paid $895 million in CFAP dairy farm payments, and a total of 15,222 dairy producers (about half) have applied. The dairy payment formula equates to $6.20 per hundredweight on Q1 milk (including dumped milk). CFAP enrollment continues through August 28, 2020.

Meanwhile, milk futures continued their multi-week march higher on the heels of record-setting CME block-cheese prices through June, pegged at $2.70/lb Monday, June 22 and then $2.81/lb Tues., June 23. Barrels shared the advance, but were a record 44-cent spread behind the block trade at $2.37/lb.

June’s Class III milk contract hit $21 Monday, up $9 from the USDA-announced May Class III price of $12.14. July’s contract topped at $22.19, and August edged into the $20s. Monday’s Class III milk futures averaged $17.98 for the next 12 months — up 69 cents from two weeks ago.

Part of the extent of Monday’s advance is attributed to new rules when higher trading surpasses the 75-cent limit, as happened Friday, the limit doubles for the next trading day, allowing more speculative activity up or down. But Monday’s spot cheese increase shored-up the gains, while after-hours trading hinted a 20-cent pull-back before another spot cheese market gain Tuesday noon narrowed the dip in fall milk futures. At mid-day Tuesday, summer 2020 front-months were another potential nickel or dime in the green, and penny to nickel gains were applied to 2021 Class III contracts.

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Screenshot of June-Sept. Class III milk futures trading at Noon CDT Tuesday, June 23 — just after the spot cheese auction on the CME in Chicago saw 40-lb block cheddar trade at yet another record high of $2.81/lb with 500-lb barrels also higher at $2.36/lb — behind blocks by a new record-setting 45-cent spread.

New block cheese futures at the CME were launched in 2020, helping processors manage the risk of the wide spreads between 40-lb block and 500-lb barrel cheddar that broke records in 2019, setting new record spreads again this week.

Class IV milk futures gains into this week have been less stellar as butter had melted off a previous advance, but firmed up late last week, then pegged a 2-penny loss at $1.81/lb Tuesday. Spot powder strengthened last week in active trade after the biweekly Global Dairy Trade auction index rose 1.9%. The first two days this week, the Grade A nonfat dry milk spot price remained pegged at $1.03/lb with just two loads changing hands on the CME.

The awaited June 22 USDA Cold Storage report confirmed that accumulating cheese moved to food-service with a seasonally-unusual and record-large natural cheese inventory pull-out for the month of May. Despite this inventory pull, cheese stocks remain 5% above year ago, and butter stocks are up 21% vs. year ago. Inventory is apparently not as negative to markets as it was pre-Covid due to the retail shortages experienced in April during the height of ‘stay-at-home’ orders. Some companies report wanting to keep more inventory instead of operating ‘hand-to-mouth.’

On the farm side, USDA confirmed 1.1% less milk was produced in May vs. year ago. USDA data also showed 13% less milk was pooled on Federal Orders vs. year ago — abruptly reducing the pooling of dumped and diverted milk. At 36 million pounds, the volume of milk pooled as “other use / dumpage” in May was a fraction of April’s 350 million pounds of “other use / dumpage” milk pooled.

DumpedMilk_Table(withMay2020)

Monitor, document, reassess, reach out

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On the financial side of handling the plummeting prices and disruptions to what was previously expected to be a better year for dairy, Dr. David Kohl, Virginia Tech, talked about the Coronavirus pandemic’s impact and how to manage it during a Center for Dairy Excellence industry call last week.

“What is different about this is that it hit everyone in the world and how sudden it was. It created demand destruction, and it has affected consumer behavior.”

Kohl said 70% of the U.S. economy is driven by consumption, and 40% of that consumption economy is tied to airlines, hotels, restaurants, recreation and the sports world. “Now that 70% of the U.S. economy has been knocked down to 30%,” he said. “We are not going to just flip that switch.”

He sees the “consumption economy” coming back to just 75% of its prior strength in the restaurant, hospitality and foodservice sectors, “because people are changing their behavior.

“We also export a lot of dairy, but we will see a move from globalization to ‘selective’ globalization,” said Kohl. “This black swan will turn into an angry bird with agriculture as the point dog for extreme volatility.”

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Dr. David Kohl

Kohl stressed three entities need to work together: producers, government, and agribusinesses/lenders. “Lenders will have to think about interest-only and principle deferments because producers will need good sound financials to get through this.”

Kohl said it is too early to tell what effect COVID-19 will truly have on exports. “The value of the dollar vs. other currencies is still strong. The economic health of countries we export to is important, watch for how the middle class is doing in those countries.”

Overall, Kohl sees the economic recovery being more of a Nike-shaped swoosh than a v-shaped bounce-back. As recovery takes shape, the foodservice and export demand will come back but not in a big way, he said, and not immediately.

He gave this advice as a financial expert, ag economist and part owner of a creamery:

  • Monitor cash-flow month-to-month and compare actual to projected to see where you stand.
  • Document losses so we can send a message about them to congressional delegations about what we need.
  • Meet with lender and accountant and go over the financials.
  • Communicate, be flexible and adapt.
  • Be real careful of knee-jerk reactions — that goes for farmers, lenders, and the government.
  • Follow protocols for the virus and know what your protocols are.
  • Never equate self-worth to net-worth.
  • Keep re-assessing your goals.
  • Reach out. Remember, you are not in this alone.

Kohl also sees opportunities for the future. “I have been outspoken on this. There is too much consolidation and concentration in our industry — whether it is dairy or beef,” said Dr. David Kohl, Virginia Tech professor emeritus as a Center for Dairy Excellence industry call guest last Thursday, April 23.

“We have to look at our supply chains and the vulnerability of them, the vulnerability of having too much power in the control of two few in the food and agriculture industry.

“America was built on small business and entrepreneurship. Even as small processors, we can go bankrupt very quickly, but this is where we also have great opportunity in the future,” Kohl suggested.

Participating on industry teleconferences and webinars over the past few weeks of the Coronavirus pandemic, Dr. Kohl has voiced his observations about how COVID-19 is changing consumer behavior and exposing food supply-chain vulnerabilities.

Some of his insights offer a systemic reality-check, but also present some forward-looking opportunities.

“We had a run-up in demand the first couple weeks of this thing. In general, it is still stronger, but we are also seeing people want local, and they want transparency,” Kohl reported. “People want to know where it comes from, how it is processed and to know the producer.”

He described the supply chain disruptions in dairy over the past several weeks as being attributed to large processing entities built on serving restaurants, universities, schools and other institutional foodservice, and catering to a segment of the international market – bulk products or tiny table sample products — not retail family-sized.

On the other side of that spectrum… “We are feeling this movement back to local, and it’s getting stronger,” said Kohl, adding that creamery home-delivery, for example, is taking off. “People want delivery.”

The other thing Kohl sees in consumer behavior is a return to “emotional food,” something some would call “comfort food.”

Consumers are not only following the science and realizing the healthfulness of dairy fat, they are gravitating toward natural, local and emotional food that brings comfort. Dairy can fit that mode very well if the consolidated supply chain can loosen the grip, open up, and welcome opportunities for local and regional models of processing and marketing.

Kohl said he sees it in the big trends and at the creamery — demand is growing for products like whole milk and ice cream — emotional comfort food.

Various fresh dairy products

— By Sherry Bunting, Farmshine, May 1, 2020

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Global dairy thoughts Part 5: First half 2018 butter, milk, cream imports climbed!

Timelines show how domestic dietary guidelines, Obama/Vilsack school milk rules and ramped up low-fat and fat-free dairy promotion through GENYOUth and FUTP60 all laid the groundwork for declining Class I fluid milk sales to pave the way for flat pricing and increased exports (now coincidentally under the industry leadership of former Sec Vilsack). Then consumers learned the truth and began coming back to whole milk and butter and full-fat cheeses even while the government turns a deaf ear in regards to the rules about feeding our schoolchildren. So what did U.S. companies and cooperatives do to keep that milk price flat enough for the export market this year? They imported more butter, milk and cream in first half 2018!

By Sherry Bunting, originally published in Farmshine, September 7, 2018

BROWNSTOWN, Pa. — Let’s take a look at the overall global dairy trade balance of the U.S.

In gross numbers, the balance is positive, showing the U.S. is winning new market share on the side of exports over imports. But this tells only part of the story, ignoring the potential milk market impacts of substantial increases in imports of milkfat at this critical time during the first six months of 2018.

In June 2018, Global Dairy Thoughts Part 3 and Part 4 covered some of the Federal Order pricing impacts of rapidly expanding exports alongside a diminishing Class I utilization. While per-capita milk consumption has steadily declined since 1980, the total packaged milk sales held their own due to population growth.

globalthoughtspartfive-chart1That is, until we hit 2009-10, when the third and fourth layers (see Chart 1 above) were added to the lowfat-push — that consequently pulled total fluid milk sales into the bucket at the same time that exports began their rapid ascent.

Expanding export utilization hits Class I utilization with a double-whammy: Smaller piece in a bigger pie, even if consumption losses are stabilized. We’ll revisit that in a future part of this series on dairy policy and logistics.

In looking at imports and doing trend comparisons for farm milk prices, fluid milk sales, total exports, total imports and the large increase so far this year in imports of butter and butteroil as well as steady increases in imports of milk and cream (condensed, non-condensed, liquid, powder, sweetened, unsweetened), there are some correlations. (Chart 2 below)

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From 2005 forward, the national average all-milk price moved in patterns concave to the corresponding imports of butter/butteroil and milk/cream on the timeline. While the totals are not huge, we all know what “a little more” can mean on the supply side when it comes to milk prices.

In the first-half of 2018, for example,  the U.S. imported 12% more butter and butteroil and 11% more condensed milk and cream, according to the European Commission’s Milk Market Observatory published August 14, 2018. (Charts 3 and 4 below)

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While the U.S. Dairy Export Council (USDEC) reports that first half 2018 dairy exports of milk powders, cheese, butterfat, whey and lactose topped 1.14 mil. tons to set a new record-high – up 20% from year ago, some interesting things were also happening on the import side.

Even though the USDEC data dashboard continues to show total imports accounting for a flat line at 4% or less of the milk supply on a solids basis, while exports accounted for 16.8% in the first six months of 2018, there are some interesting aspects of the import picture related to ‘what’ and ‘when’.

According to the August 14 EC statistical report ranking top-10 importers and exporters of various dairy commodities, the U.S. ranked third in butter and butteroil imports, up 12% from year ago and not far behind China (1) and Russia (2) during the first half of 2018.

The U.S. also ranked fourth in imports of condensed milk and cream – up 11% compared with a year ago.

When butter substitutes, containing over 45% butterfat, are included in the butter and butteroil import total, as documented at the U.S. International Trade Commission (USITC) import monitoring website, the U.S. butter/butteroil total rises by more than 200% during the past three quarters (Sept. 2017 through June 2018) compared with the same nine months a year ago.

While half of the butter and butteroil imports came to the U.S. from EU countries, a majority of the other half came from Mexico, according to the USITC website listings under various Harmonized Tariff Schedule (HTS) codes.

In the condensed milk and cream category, 8% of U.S. imports came from the EU, according to the EC report.

Sifting through the tedious lists and multiple codes and combinations at the USITC website, it appears the U.S. imported quite a bit of condensed milk and cream from Mexico, a little from Canada (though less from Canada than a year ago), and the remainder from sources scattered around the globe — even China.

For the past nine months, Sept. 2017 through June 2018, the condensed milk and cream, unsweetened, category of imports was up 44% in powder or granular form compared with the same period a year ago, while milk and cream imports, unconcentrated, unsweetened, and still in liquid form, were up 22%.

Imports of sweetened condensed milk and cream were up 7% and mainly from Mexico.

Of course, the U.S. remains the top importer of casein and caseinates, even though those imports were down 15% from a year ago during the first half of 2018, according the EC report.

Doing the math on milk protein concentrate (MPC) imports for the nine months from September 2017 through June 2018 listed at the USITC site, MPC imports in both the 0404 and 3500 HTS codes, combined, were down 1.3% compared with the same period a year earlier.

On the other hand, imports of milk protein isolates (MPI) were up 31% from Sept. 2017 through June 2018 compared with the same three quarters a year ago.

Looking further into other categories, imports of “textured protein substance, including dairy” were up 40% for the past nine months compared with a year ago.

In the significant dairy-containing “food prep” categories — including infant formula and having various percentages of milk solids and butterfat — imports were up 7% during the past nine months compared with a year ago. In this particular category, including confectionary products containing significant milk solids, Canada was a primary source, along with EU countries as well as some of these imports coming from Chile and other South American countries.

Process cheese product imports were up 46% during the past nine months compared with a year earlier.

While U.S. imports of ice cream were down relative to year ago, the total when combined with import categories in other HTS codes for “edible ice containing dairy” tallied an import total that was up collectively by more than 200% over year ago during the past nine months.

To read Parts 1 through 4, click these links: Part 1, Part 2, Part 3, Part 4

And stay tuned for this series to continue as 2019 trends develop abroad and on the homefront.

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