Tag Archives: market moos

Market Moos – Apr. 7, 2021

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By Sherry Bunting, republished from Farmshine, April 9, 2021

Class III futures gain big,
Cl. IV modest, spread widens

CME Class III and IV milk futures made a strong turnaround last week and continued to rally higher this week — especially on the Class III where $19s returned to the board for May through August and new contract highs were set all the way across the board.

The big gains on Class III vs. smaller gains on Class IV widened the Class III / IV spread that is currently averaged to determine the Class I base price, which affects PPDs and de-pooling.

The spread between the 12-month averages expanded to $1.75 over the next 12 months, with May through September contracts showing the potential for a $2 to $4 spread between Class III and IV.

On Wed., April 7, Class III milk futures for the next 12 months averaged $18.43 — up 32 cents from last week and almost $1.00 higher than two weeks ago. (Additional gains were made through Fri., Apr. 9.)

Class IV milk futures for the next 12 months, on the other hand, averaged $16.68 on Wednesday — up just 8 cents from last week and 75 cents higher than two weeks ago

CME cheese, powder higher,
whey firm, butter melts off early gain

On the spot dairy product markets via the CME this week, cheese had big gains, powder put on a penny, whey stayed firm at last week’s higher levels, and butter advanced early before erasing the advance at midweek to be a fraction of a penny lower than a week ago.

By Wed., April 7, the 40-lb block cheddar price was pegged at $1.80/lb, up 6 cents from a week ago with 4 loads trading; 500-lb barrel cheddar was at $1.58/lb, up a full dime from a week ago with 3 loads changing hands.

Dry whey on the CME spot market remained firm at last week’s advance, pegged at 66 cents/lb again Wed., Apr. 7 with zero loads changing hands.

Butter gained its way to $1.83 by Tuesday before losing almost 2 pennies Wed., April 7 when 9 loads traded, and the CME spot price was pegged at $1.8150/lb — a fraction of a penny lower than the previous Wednesday’s spot butter price.

Nonfat dry milk gained a penny this week. On Wed., April 7, the spot price for Grade A NFDM was pegged at $1.1925/lb with 2 loads changing hands.

March protein question answered

Last week in this column, the March Class and Component prices announced by USDA last Wed., March 31 were reported, and the protein price at $2.6954/lb — down about 30 cents from February — seemed to be a “head-scratcher” given the fact that all end-product prices were higher, and the Class III, IV and II prices also ended up higher.

Reaching out to USDA questioning whether this was correct or a typo, here’s how a USDA source explained the interaction of the fat and skim as a sort of ‘snubber’ or offset for protein vs. fat when butter gains are larger than cheese gains in value in the wholesale market as reflected by by end-product pricing, with fat and skim yields applied. (There’s a story to this phenomena, stay tuned for another edition explaining the how and why this ‘snubber’ came to be.)

Meanwhile, USDA referred me to this formula for the protein price calculation on page 5 of the monthly Class and Components announcement:

Protein Price = ((Cheese Price – 0.2003) x 1.383) + ((((Cheese Price – 0.2003) x 1.572) – Butterfat Price x 0.9) x 1.17).

The USDA source explained in an email as follows:

“The protein price is a function of both the cheese price and the butter price. If you look at page 5 of the report ‘Announcement of Class and Component Prices’ for March 31, 2021, you will find the formula for the protein price. In that formula, you will note the use of both the cheese price, which is the weighted average of both block and barrels, and the butter price. Please note that the use of the butter price has a negative sign, i.e. as the butter price goes up everything else held the same, the protein price goes down. So, while both the cheese price and butter price went up; the increase in the butter price for March compared with the February price was much larger than the (increase for the) cheese price, so the protein price declined.”

The USDA explanation continues:

“The Class III skim milk price is down in March about 60 cents per cwt ($0.0060 per pound) when compared with February, i.e. using the lower protein price of about 30 cents per pound times 3.1 pounds plus a small increase of about 5 cents in the in the other solids price times 5.9 pounds results in the decline of about 60 cents per cwt ($0.0060) for the Class III skim milk price. The Class IV skim milk price in March is about unchanged, up 1 cent per cwt ($0.0001 per pound) as the nonfat dry milk price was up only $0.0005 per pound.

“Both the Class III and Class IV prices are equal to 96.5 pounds of skim milk times the skim milk price for each class plus 3.5 pounds of butter times the same butterfat price. So, with the Class III skim down 60 cents per cwt ($0.0060 per pound) but the butterfat price up $0.28 per pound. The Class III and Class IV prices both increase. The gain in Class IV was $0.99 per cwt while the Class III price was up 40 cents per cwt.”

USDA reports Feb. All Milk price at $17.10, DMC margin $6.22

February’s All Milk price was announced last week at $17.10 and based on an national average butterfat of 4.10%. This was 40 cents lower than the January All Milk price at the same time that feed costs went higher.

The combined result was a Dairy Margin Coverage (DMC) margin for February announced this week at $6.22/cwt, the lowest since April and May 2020 when at the height of the Coronavirus pandemic shut down, the DMC margin was calculated at $6.03 and $5.37, respectively.

Letter signed by producers, groups, seeking remedy for failed Cl. I formula makes its way to NMPF / IDFA

On Federal Milk Market Order pricing — namely the failed change in how the base Class I price is formulated — National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) are at the table, according to U.S. House Ag Committee Ranking Member G.T. Thompson.

Sources indicate they are discussing various proposals and approaches. Meanwhile grassroots organizations representing dairy producers are continuing their almost weekly group conference calls and seeking a seat at that table.

Farmshine readers are aware that dairy producers from across the U.S., along with many state dairy associations and the American Dairy Coalition, came together in early March to compose a letter to NMPF and IDFA, addressing the impact of massive depooling in relation to large negative PPDs for dairy farmers across the U.S.

The letter specifically identifies the change in how the Class I base price is calculated, which NMPF and IDFA put forward, Congress passed in the 2018 Farm Bill, and USDA implemented in May 2019. The letter, signed by hundreds of producers and many producer organizations, will be officially sent to NMPF and IDFA by the end of this week (April 9), according to the ADC.

Specifically, the Farm Bill language states that the Class III / IV averaging method + 74 cents – instead of the previous “higher of” method – was to be implemented in 2-year periods. This suggests we are now at the point in time where something can be done to adjust this formula before the next 2-year period of implementation begins.

Meanwhile, dairy economists are being featured in webinars, zoom conferences and other venues to explain and ‘educate’ producers on PPDs, what impacts them, and how other aspects of Federal Milk Marketing Order pricing formulas, rules and provisions all work. All of it has become a hot topic since the new Class I formula implemented May 2019 leaves in its wake over $700 million in NET losses on Class I value, alone over 23 months, and upwards of $3 billion when negative PPDs and depooling are factored in.

While the change assisted in the idea of risk management for milk buyers, it has introduced significant and costly basis risk for milk producers, interfering with producer risk management tools, and has led to staggering net value losses by most dairy producers over 23 months since implementation, also undermining the purpose of the FMMOs with regard to the orderly marketing to assure milk moves to Class I fluid milk use.

Education is good. Solutions are better. Remember, the selling point to Congress for making the Class I formula change from ‘higher of’ to average + 74 cents in the 2018 Farm Bill was that dairy producers would be “held harmless”… Instead, they are being robbed. Stay tuned.

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

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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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