Prices increased at the Global Dairy Trade auction this past week, igniting rallies across the dairy complex. Buyers from Asia and the Middle East bid with enthusiasm. The Global Dairy Trade index increased 6.7 percent, its strongest performance since November 2016. Nearly all product prices increased, but milkfat products and powders were particularly buoyant. Whole-milk powder surged 8.4 percent to its best price since June. Skim-milk powder climbed 3.9 percent to a two-year best price, reaching the equivalent of nonfat-dry milk at $1.23 per pound, far above benchmark skim-milk-powder and nonfat-dry-milk prices in Europe and the United States. Chicago Mercantile Exchange spot nonfat-dry milk was uninspiring in comparison. It closed Feb. 8 at 99.5 cents per pound, a decrease of 0.75 cents from Feb. 1.
The other CME spot markets gained ground. Spot dry whey rebounded 0.25 cents to a still-meager 36.5 cents. Butter added a half-cent to reach $2.295, on the good end of its well-trod trading range. Cream is relatively inexpensive and butter churns are running hard.
The cheese markets offered more excitement. CME spot Cheddar blocks climbed 2.75 cents to $1.5275, the best value since mid-October. Cheddar barrels surged 7.25 cents to $1.3725, the best price in more than three months. March and April Class III futures gained some ground this past week, but deferred contracts decreased. Class IV futures were mostly a nickel or so in the red.
The spot-cheese rally and anecdotal reports suggest that although barrels remain plentiful, supplies are less burdensome than they have been. The U.S. Department of Agriculture’s Dairy Products report shows milk continues to move to cheese vats. Although the data is stale, it helps to clarify the shift in the dairy-product mix as milk supplies tighten in the east and continue to grow in the west. U.S. cheese production in November was more than 1.08 billion pounds, 1 percent more than the prior year. A 5.2 percent year-over-year increase in western cheese production more than filled in for a 3.3 percent shortfall in the Atlantic region and a 1.5 percent decreased in the central states. Cheddar output in November was 2.7 percent more than in November 2017, which helps to explain the abject weakness in the spot Cheddar market during the past few months.
Considerably less milk went into Class IV products in November. Butter output decreased 2.7 percent from the prior year, to 145.6 million pounds. Production decreased 12.8 percent in the Atlantic region, 3.2 percent in the central states, and 0.1 percent in the west.
Combined production of nonfat-dry milk and skim-milk powder decreased to 160.9 million pounds, a decrease of 12.1 percent from November 2017.
Nonfat-dry-milk output decreased 4 percent in the west, 8.1 percent in the Atlantic states, and 18 percent in the central region.
Better Class IV prices could not coax milk away from the cheese vats in November. Cheesemakers continue to run at or near capacity across the nation, with one notable exception. California cheese output is likely starting to slow. Cheese processors in the nation’s largest dairy state are now paying more for milk using the Federal Milk Marketing Order formula than they would have under previous rules. Many manufacturers are running full schedules at their cheese facilities, but some contacts suggest a few processors are starting to ease back on cheese production and divert milk intakes toward Class IV uses. That’s excellent news for California dairy producers in particular and for dairy product prices in general. The shift in the product mix will mean a greater share of California dairy-producer milk checks is based on the much better Class IV price. Incrementally less cheese output will slowly increase cheese prices relative to where they would have been had California stuck with its previous milk-pricing formulas. The reverse is true for milk-powder pricing.
Although U.S. dairy products are competitively priced, exports did not impress in November. Retaliatory tariffs from China and Mexico are clearly taking a toll. U.S. butter and milkfat exports were 41.4 percent more than year-ago levels. But the gain was more than offset by increased butterfat imports. All other dairy-product categories reported lesser export volumes than in November 2017. The United States sent abroad 12.7 percent less nonfat-dry milk, 9.5 percent less cheese, 62.6 percent less cream, and 18.1 percent less whey products than in the prior year.
Exports accounted for 13.9 percent of U.S. milk-solids production in November, according to the U.S. Dairy Export Council. That’s a decrease from 16.8 percent in the first half of the year, before Mexican and Chinese tariffs took effect. From July to November, U.S. dairy product exports to China decreased 34 percent. Cheese exports to Mexico grew 2 percent in the first half of 2018 but decreased 4 percent from July to November.
Less milk-powder exports contributed to an increase in U.S.-manufacturer stocks of nonfat-dry milk from October to November, despite slowing production. The month-to-month increase suggests demand for milk powder slowed, likely due to rising prices. CME spot nonfat-dry milk approached 90 cents per pound in late November, which could have deterred buyers – at least temporarily. Continued increases in nonfat-dry-milk prices during the past two months suggest buyers have become resigned to more-expensive milk powder. And this past week’s Global Dairy Trade auction makes U.S. nonfat-dry milk look like a bargain despite the strengthening U.S. dollar.
Grain markets quiet
It was a surprisingly quiet week in the grain markets. March corn futures decreased 4 cents to $3.7425 per bushel. March soybeans decreased 3.25 cents to $9.1775. After the government shutdown ended, the USDA released a slew of data regarding crop production and demand. The markets greeted the reports with a shrug. Although USDA decreased its estimates of 2018-2019 corn and soybean yields, inventories remain large. The agency decreased its projection for end-of-season soybean inventories from 955 million bushels to 910 million bushels. Although less than the USDA’s December estimate, that’s still more than double the size of soybean inventories in the preceding decade. With a massive domestic stockpile and decent crops in South America, the market should be signaling farmers to plant fewer soybeans. Planting season is fast approaching and at today’s prices farmers are not listening to the message.