Milk, Dairy and Grain Market Commentary By Sarina Sharp, Daily Dairy Report
The government let a little air out of the milk markets this week. Most Class III and Class IV futures contracts lost between 10 and 30ȼ. For the past six weeks, cheese prices have climbed ever higher thanks to accelerating demand from restaurants and speculation that USDA would continue to buy and donate dairy at a heady clip. But on Tuesday USDA announced that it would end the Farmers to Families Food Box program once May is over, squelching hopes – and fears – surrounding the kind of government spending that propelled the cheese and Class III markets to unsustainable heights in 2020. Although the cheese markets staged a comeback today, they finished lower than where they began the week. CME spot Cheddar blocks dropped a nickel to $1.78 per pound. Barrels ultimately fell just a quarter-cent and closed at $1.69. Butter also weakened. Spot butter slipped 3ȼ to $1.85.
Demand for both cheese and butter remains strong, as restaurants restock and retailers have yet to pull back. Americans spent $127.7 billion at restaurants and grocery stores in March, the highest total on record. Grocers continue to ring up stellar sales, and spending at restaurants is almost back to pre-pandemic levels. At some point, consumers will pare back on grocery purchases as restaurant visits become more routine and their pantry shelves grow heavy. But for now, both food sectors are pushing product at a good clip.
The protein powders continued to climb. CME spot nonfat dry milk (NDM) added a penny and reached a fresh 14-month high at $1.215. Spot whey jumped 4.5ȼ to 67.5ȼ, its highest price on record. Although the spring flush is in full swing, driers are running below capacity in the Great Lakes states as the new cheese plant laps up a greater share of the regional milk supply. Both domestic and export demand are strong, but logistics issues have slowed some sales. The container shortage and port backlogs add to the cost of freight and delay deliveries. Although U.S. milk powder is priced to move, the freight issues are likely trimming sales – and prices – at the margin. But tightening milk powder stocks in Oceania and low output in Europe suggest the U.S. will continue to fare well in foreign markets.
European milk collections were just shy of 27 billion pounds in February, assuming steady milk production trends in Sweden. Adjusted for leap day, that is 0.4% lower than in February 2020, following a 0.7% shortfall in January. Output fell below year ago levels in all the major dairy nations except the United Kingdom, Italy, and Ireland. Polish milk collections were 0.3% lower than in February 2020, a rare decline for one of Europe’s most consistent sources of growth. Lower European milk output helped to offset about 40% of the growth in U.S. milk production in the first two months of the year.
U.S. milk output remains strong, but expenses are on the rise. Feed costs are starting to bite, especially in the West, where dairy producers must pay unusually steep freight rates on top of already high grain and protein prices. Regional drought and scarce inventories compound the Western feed shortage and raise the cost of milk production noticeably. Pricey inputs will weigh on milk output eventually. However, given the massive milk-cow herd and relatively low slaughter rates, milk production is likely to remain formidable in the near term. Fortunately for dairy producers, strong demand has supported dairy product values.
USDA Ends Farmers to Families Food Box
By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs
The USDA Farmers to Families Food Box program started in May of 2020 as an emergency COVID-19 response program to get food to people in need. The concept was simple – pay vendors to put a certain amount of food in a box and deliver it to anyone who would take it. No need for people to qualify.
USDA administered five rounds of this program, distributing 157,544,167 boxes of food. A gallon of milk and a pound of cheese was required to be in every box, as well as 5 more pounds of dairy products, which the vendor could select. When these original contracts were made, vendors, for the most part, had not secured the required items to put in the boxes. The delivery requirements were tight and the immediate demand for cheese to fill the boxes overwhelmed the market and drove cheese prices to unprecedented levels. The same demand did not apply to butter. While butter was an optional dairy product, it had to compete in price with other dairy products like yogurt and sour cream which have a much higher moisture content and are therefore less expensive on a per pound basis.
Milk pricing for American dairy farmers is very much tied to the Federal Milk Marketing Order (FMMO) classified pricing system, which has separate milk prices for milk made into cheese as opposed to milk turned into butter and nonfat dry milk. The result of dramatically different demand for cheese compared to butter and powder caused a huge gap between Class III (cheese milk) and Class IV (butter/powder milk). This higher price for Class III incentivized cheese plants to “depool” and not share those increased revenues with the whole order. Furthermore, a 2019 change to the FMMO Class I price formula that now uses the “average of Class III and Class IV” as the base price instead of the “higher of Class III or IV” meant that Class I prices for several months were lower than the Class III price, which also contributed to a shortfall in funds in the Federal Milk Marketing Order pools. This shortfall of revenues played itself out in negative Producer Price Differentials (PPDs) on producers’ milk checks, which caused a lot of questions and concerns in the producer community.
For months, producers and their representatives have been asking USDA to take this imbalance in milk prices to farmers into account as they carry out their purchases of dairy products. The announcement that the food box program is ending is the first indication that change is coming. Hopefully, what follows will be better.
Secretary Vilsack testified and took questions at a hearing of the House Agriculture Appropriations Committee this week.
For your convenience, we have put together a short excerpt of the hearing related to questions and answers of the following:
• The Food Box program
• The Estate Tax
• The Stepped-up Tax Treatment
• Flavor Milk in the School Lunch Program
• Ag Export Dependance On China
The hearing also spent quite a bit of time talking about expanding broadband access in rural areas, beef marketing oversight, nutrition programs and social justice.