The United States, Mexico and Canada have reportedly reached a deal to waive the Trump administration’s Section 232 steel and aluminum tariffs. That’s great news for dairy.
The metal tariffs prompted Mexico to retaliate with a 10 percent tariff on U.S. cheese imports. It’s likely Mexico will drop the punitive border tax. The Section 232 tariffs have also stood in the way of Congress taking a vote on the U.S.-Mexico-Canada Agreement to replace the North American Free Trade Agreement. If the new agreement can pass Congress, it will phase in limitations on Canadian skim-milk-powder exports. In the meantime our friendly neighbors to the north have been dumping skim-milk powder abroad at rock-bottom prices.
The cheese and Class III markets increased sharply in response to the positive trade news. Most contracts settled 30 cents to 40 cents more than the previous Friday. The August through December Class III contracts climbed back to more than $17 per hundredweight. Nearby Class IV futures increased this past week, while deferred contracts lost ground. Class IV futures are sitting comfortably at more than $17 throughout the second half of the year.
Chicago Mercantile Exchange spot butter surged to a fresh year-to-date best price, at $2.385 per pound. But then it took a big step back this past Friday to finish at $2.34, steady with the previous Friday. Cream multiples are increasing, which is likely reducing churn rates. Given the belated arrival of ice cream season and tighter milk supplies, cream is likely to remain pricey.
Some butter buyers are growing apprehensive, according to the U.S. Department of Agriculture’s “Dairy Market News.”
“End users are anxious to assure coverage and possibly avoid the risk of higher butter prices later in the year,” it stated. “As favorably-priced bulk offers come available, buyers have been jumping at them.”
But European butter is priced to move. Imported butterfat may put a lid on the butter market before it reaches the frothy levels last seen in 2014 and 2015.
CME spot nonfat-dry milk decreased 2 cents this past week to $1.0475. Fresh powder is becoming more difficult to come by, and merchants are moving nonfat-dry milk to Mexico in large volumes. The spring flush has not impressed in the Midwest. There are new or expanded facilities to make more valuable dairy products, which has further reduced the truck lineup at driers around the country. European skim-milk powder is by far the cheapest in the world, which helped Europe to export milk powder in record volumes in March. While European skim-milk-powder prices may drag U.S. nonfat-dry milk to cheaper prices, the reverse seems more likely.
The trade headlines came too late to prevent a setback in spot Cheddar. Blocks slipped 0.75 cents to $1.6725. Barrels decreased 8.5 cents to $1.625. The cheese markets seemed a bit tired after the previous week’s sprint. They struggled to find their footing early in the week.
The prospect of a trade deal may give cheese a stronger start out of the gate this week. Prices are likely to remain well-supported. Spot milk is generally trading par with Class III, compared to a $3 discount at this time in 2018 and a $4.50 discount during mid-May 2017. Barrel makers have much less incentive to run their plants at capacity. Fewer processors are putting in seven-day work weeks despite the flush.
But better prices are having an impact. Midwestern processors say orders are a bit softer, and U.S. cheese is looking expensive relative to product from Europe. CME spot whey closed at 34 cents, a decrease of 0.75 cents for the week. The whey market fundamentals are bleak.
The U.S.-China trade relationship seemed to sour after a string of miscues; our largest foreign market will keep its punitive border tax in place for now. The United States is taking increasingly smaller bites of a shrinking pie. China’s hog herd, which consumes much of the nation’s whey, has been decimated by African Swine Fever. China’s Ministry of Agriculture and Rural Affairs found sow inventories in March had decreased 21 percent from a year ago. Most hog producers in China who have faced the disease say they will wait for some time – perhaps a year or more – before restocking their barns to ensure the disease doesn’t strike them again. Chinese demand for imported whey is likely to remain depressed for years.
But the bad news is widely known, and the futures have likely decreased far enough for now. They increased almost every day this past week. Better milk checks are finally hitting the mailbox. But it’s unlikely dairy producers are turning their sights toward expansion. There’s a lot of healing left to be done. The auction dockets remain full.
At first glance it seems dairy producers may have finally stopped culling at a liquidation pace. In the week ending May 4, dairy producers slaughtered 57,074 head. That’s a decrease of 0.7 percent from the same week a year ago. But this past year’s slaughter was the largest on record for this time of year – excluding 1986, the year of the cow-kill program. The industry is still culling cows at a historic rate; year-to-date slaughter is 5.1 percent more than the record-setting 2018 pace. Dairy producers are not likely to overwhelm the recovery with overproduction anytime soon.
Rain makes grain, but only if a producer can put the crop in the ground. As of May 19 evening, farmers had only planted 30 percent of their intended corn acreage and 9 percent of planned soybean acres. Muddy fields and cloudy skies slowed progress this past week, and the forecast holds heavy rains across the Corn Belt for at least the next two weeks. Millions of acres are likely to lie fallow, as farmers opt to take Prevented Planting insurance payments rather than ruin their fields and equipment trying to plant seeds into muddy ground.
Corn prices increased. The July contract settled at $3.8325, an increase of more than 30 cents per bushel. Soybeans rallied 12.5 cents, with July beans at $8.2175. If the weather clears, some corn acreage could shift to soybeans. But the forecast suggests soybean acreage is likely to suffer as well.