Butter has a meltdown in most recent global dairy trade

posted Dec. 11, 2017 9:15 a.m. (CDT)
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by / Lee Mielke

Bleeding in the Global Dairy Trade auction was stopped Dec. 5, reversing four previous events of decline. Trading saw the weighted average for all products inch up 0.4 percent following a 3.4 percent plunge Nov. 21 and 3.5 percent Nov. 7. And the amount of product offered fell to 65.1 million pounds after averaging 76.2 million the past eight sessions.

Leading the charge was skim milk powder, up 4.7 percent following a drop of 6.5 percent Nov. 21. Buttermilk powder was up 4.3 percent and rennet casein was up 3.4 percent after leading the declines last time, plunging 12.6 percent.

There still was a lot of red ink, with butter showing an 11.1 percent meltdown after it dropped 5.9 percent last time. GDT Cheddar was down 3.9 percent following a 4.2 percent loss, and anhydrous milkfat was off 0.6 percent.

FCStone equated the GDT 80 percent butterfat butter price to $2.0246 per pound U.S. GDT Cheddar cheese equated to $1.6764 per pound U.S. and compares to the Dec. 8 CME block Cheddar at $1.4750. GDT skim milk powder averaged 80.49 cents per pound U.S., and whole milk powder averaged $1.2836.

HighGround Dairy says “butter was the biggest surprise at (last) week’s event, melting down to lows not seen since January. Convergence has occurred in the global butter market with NZ-sourced product now the cheapest in the world.”

CME block Cheddar fell to $1.47 per pound on Dec. 6, the lowest price since April 11, but closed Dec. 8 at $1.4750, down 8.75 cents on the week and the sixth consecutive week of decline, 23.5 cents below a year ago when it lost a dime, and at a record 19.5 cents below the barrels. Barrels closed the week at $1.67, up 13.5 cents and 9.25 cents above a year ago, with 34 cars of block finding new homes on the week at the CME and 56 of barrel.

Milk remains available for cheese production in the Midwest, according to Dairy Market News, with spot milk prices flat to $4 under Class for the second consecutive week. Holiday milk offers are beginning to come in, but some cheese producers are prepared to hold off until prices decline. Cheese production is steady and not expected to slow until the holidays. Cheese sales are steady to slower, but the atypical inversion of block and barrel prices remains a concern.

Western cheesemakers report a lot of milk is available and cheese production is active. “However, cheesemakers also express, with a certain amount of candor, their hesitancy to take on more milk,” according to DMN. “While lower prices are generating some new interest in international markets, cheesemakers are watching the cheese and Class III milk futures closely for any sign that could encapsulate the belief that cheese prices may weaken further.”

DMN says “there is an underlying concern that lower cheese prices and lagging milk prices could make it difficult for manufacturers to recoup costs of the milk.” It adds that cheese demand is solid now, but “there is some question what demand will look like after end of the year festivities.”

FC Stone dairy broker Dave Kurzawski explained the block-barrel price spread concern in a Dec. 11 Dairy Radio Now interview. He pointed out that “if you’re a block manufacturer, you’re paying a Class III milk price but you’re selling a block cheese price.”

The Class III price is made up of both block and barrel prices, he said, and if you have a barrel price that’s 10 cents over the block price, for example, then your cost of milk is more expensive. He says the natural spread should be blocks 3 to 5 cents above the barrels. He adds that five of the past 10 years has seen a barrel over block spread develop in December.

Cash butter fell to $2.19 per pound Dec. 4, climbed back to $2.2375 Dec. 7 but closed Dec. 8 at $2.22, up a half-cent on the week and 15.5 cents above a year ago when it dropped 12 cents. Sixty cars were sold on the week. Some Central butter plant managers eased production the week of Dec. 4. Retail and foodservice orders, in some cases, were slower the previous two weeks. Others report steady to solid interest in both salted and unsalted product. Butter inventories are reportedly balanced, but cream has become readily available and contacts suggest this trend will continue throughout the month.

Down on the farm, dairy margins were mixed over the second half of the month, as spot Fourth Quarter slipped while deferred margins into 2018 all improved, according to the latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC.

The MW says “milk prices have recovered somewhat in deferred periods following recent news that China will lower their current tariff on U.S. cheese imports from 12 to 8 percent, while some other dairy products, such as hydrolyzed protein formula and pre-packaged infant foods, will likewise drop, effectively immediately. Chinese demand has been quite firm and the move should help the U.S. reduce the current high stockpile of cheese.

“Feed prices held relatively steady over the past two weeks, although soybean meal prices have begun moving higher on indications of strong soybean demand at current price levels,” the MW concludes.

Dairy Management Inc.’s November Dairy Market Report states that “U.S. Cheddar cheese prices hit a 10-month high in October, while butter prices softened but remained well above $2 a pound. Nonfat dry milk and dry whey prices are showing extended weakness due to deteriorating prices in world markets, which are overhung by excessive stocks of skim milk powder in the European Union. Against this backdrop of prices, there are some recent signs that overall supply has been gradually heading back toward balance with demand in U.S. domestic dairy markets. These include year-over-year growth in milk production well below 2 percent, slower growth in cheese production, further reduction in cheese stocks and continued growth in cheese exports.”

It seems that everyone is trying to convince President Trump not to terminate the North American Free Trade Agreement. That, according to Bob Gray, editor of the Northeast Dairy Farmers Cooperatives newsletter. Gray reports that “senators Joni Ernst of Iowa and Deb Fischer of Nebraska emphasized that any changes to NAFTA should not hurt livestock or crop producers. Agriculture strongly depends on free trade agreements.

“U.S. food manufacturers exported $25 billion in food products to Canada and Mexico in 2015. Without NAFTA, those exports could have faced up to $3.8 billion in extra tariffs, including tariffs averaging 28.3 percent on meat products and 22 percent on dairy products.

“U.S. farmers and ranchers exported $15 billion in farm products to Canada and Mexico in 2015. Without NAFTA, those products would have had $657 million in extra tariffs, including those averaging 6.6 percent on oilseeds and grains,” Gray writes.

Lastly, a reminder that dairy farmers wishing to participate in the 2018 Dairy Margin Protection Program must enroll by Dec. 15.

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