Milk, Dairy and Grain Market Commentary By Monica Ganley, Daily Dairy Report
Spring has sprung across the United States. As the days lengthen and the temperatures rise, milk production is also growing seasonally. In the Western region of the country, market participants indicate that peak production levels are on the horizon, perhaps just weeks away. Meanwhile, in the Upper Midwest, while seasonally high volumes are a bit further off, market participants continue to report very strong figures relative to prior year. Bottling demand has perked up as students return from spring break, but milk remains readily available for manufacturing needs.
Abundant raw milk has translated into record setting production of dairy products. In USDA’s Dairy Products report released on Thursday, production of butter, cheese, and nonfat dry milk in February was the highest ever seen for that month, at least on an average daily basis. With milk production expected to stay strong, dairy product production will continue to be robust. This aggressive production threatens to overhang the market unless demand can demonstrate a meaningful and sustained expansion.
Yet despite supply concerns, the CME spot dairy markets all saw gains over the course of the week. Butter had the biggest weekly rise, adding 7¢ during the short week with 19 loads trading hands. After closing Thursday’s spot session at $1.845/lb., spot butter prices are now the highest they have been since June of last year. Butter demand has improved as spring holiday baking has supported retail purchases while the reopening of restaurants increased the pull from foodservice. New crop butter rules are also likely helping to support some of the spot price increase, since there is no denying that product is readily available. February butter production set a new record for the month. At 185.6 million pounds, butter production was up 2.2% year over year, after accounting for the leap day.
Cheese markets also got a boost this week. Market participants indicate that food service demand for cheese has improved markedly, which is helping to keep some tension in the market. Nevertheless, cheesemakers have been busy, manufacturing a total of 1.043 billion pounds of cheese in February. Representing an increase of 4.7% versus February 2020, cheese production set a record for the month. Production data shows that manufacturers favored the production of American style cheeses during February, though Cheddar output in particular has slipped compared to earlier months. Meanwhile, the production of Italian style cheeses also increased versus prior year, albeit by a slower margin than American style cheeses. Improving restaurant activity should disproportionately benefit Italian cheese demand in the coming months.
Cheddar blocks were able to capitalize on the increase in demand, though the spot market was fickle. Price increases on Monday and Thursday counteracted a penny drop on Wednesday, ultimately pushing the spot price up by 5.5¢ to $1.775/lb. Barrels were more consistent, with prices marching upward in three out of the four daily spot sessions, finishing the week at $1.5125/lb., up a nickel from last week.
February production data illustrates that during the month dryers held a strong bias for producing nonfat dry milk (NDM) for use in the domestic market or to be shipped to nearby Mexico, versus skim milk powder which would likely be sent farther afield. Totaling 186.3 million pounds for the month, NDM production was up by 13.0% year over year. Meanwhile, SMP production slipped by 20.3% to 29.6 million pounds. This preference is likely a reflection of the nagging logistical issues that are preventing U.S. produced SMP from being easily exported. Strong NDM production also translated to a buildup in stocks as manufacturers’ stocks 1 1.02 1.04 1.06 1.08 1.1 1.12 1.14 J F M A M J J A S O N D Billion Pounds (30 Day Month) U.S. Total Cheese Production 2019 2020 2021 0 100 200 300 400 500 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 Million Pounds Manufacturers' Stocks of NDM Milk Producers Council Weekly Friday Report April 2, 2021 3 of NDM grew to 345.6 million pounds at the end of February, the highest amount ever recorded at the end of that month. In the spot NDM market, the price rose by a half cent in each of the four trading days of the week, bringing the price on Thursday to $1.19, up two cents from last Friday’s close.
The whey markets continue to move upward, with the spot dry whey price boasting a new record this week. After opening the week unchanged and adding just a quarter cent on Tuesday, the price moved up by 3¢ on Wednesday as three loads traded hands. The market remained unchanged at 66¢/lb. on Thursday. Dry whey production rose by 4.3% year over year in February, as strong cheese production threw off a plentiful whey stream. Yet, dry whey production paled in comparison to the manufacture of higher protein products. Production of whey protein concentrates and whey protein isolates rose by 8.8% and 28.3%, respectively. This preference for higher protein products continues to keep tension on the dry whey market, contributing to the spot price increase.
Activity in the spot dairy sessions combined with noise in the grain markets had a significant influence on milk futures over the course of the week. After posting some mixed performance on Monday and Tuesday, Wednesday’s Prospective Plantings report suggesting impending feed price increases contributed to significant gains in the Class III futures market. Several nearby contracts traded as high as limit up before settling off these highs. Some further gains during Thursday’s session pushed prices higher still. The MAY21 Class III contract settled on Thursday a full 95¢ higher than on Monday. Most nearby Class IV milk futures contracts also saw gains over the course of the week, bolstered by increases in the spot butter market.
California’s Quota Has Been 60-plus Years of Compromise
By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs
In the 1960s – at the urging of producers – a statewide milk income pooling plan was adopted in California. It established regulated minimum prices for all Grade A milk and required the pooling of income from Class I (fluid milk) and some Class II (soft dairy products), while also allowing the pooling of income from the other classes of milk. At that time, California was not eligible to be part of the Federal Milk Marketing Order (FMMO) program since geographic isolation meant there was little interstate shipment of milk.
Prior to the adoption of the California Marketing Order, a contract system between producers and milk buyers existed, where producers were paid based on the use of their milk at an individual plant. Obviously, contracts with Class I bottlers were sought because of the higher prices those buyers could pay. This led to abuse, and often illegal activity, as some bottlers used this leverage to extract concessions from producers who competed for those Class I contracts. The new California Order was designed to take away this power from the processors and equalize revenue to producers across the Golden State.
The birth of a $1 billion asset
In the political deal struck to implement the California Order, “quota” was created and allocated to producers based on the percentage of their milk sold as Class I in the period just prior to the start of the California Order. This compensated those who had high Class I contracts but were giving up those higher milk checks to establish a market-wide pooling of milk revenue. The plan also included mechanisms to allocate new quota as the Class I market expanded to those who were short of quota at the beginning.
As milk production in California grew above Class I usage, more and more milk not covered with quota came into existence. From the beginning, quota was transferable, and producers bought and sold it to each other as they structured their businesses to fit their individual circumstances. Eventually, quota was an asset worth more than $1 billion.
Enter California’s federal order
As California grew to become the nation’s largest dairy state, the inability of its state order to regulate interstate commerce became an issue. Milk supplies were developed just out of state and shipped into California to take advantage of the state’s inability to protect its own market. But of more significance was the fact that California’s nearly 50-year-old order enforced minimum prices on all buyers of Grade A milk, regardless of usage.
For decades, the California Order generally aligned to FMMO prices across the country. However, when policymakers at the California Department of Food and Agriculture (CDFA) established minimum prices for milk that were substantially below FMMO prices — particularly for cheese (known as Class 4b milk in California or Class III in the FMMO) — California producers suddenly faced a significant competitive disadvantage and lower milk checks compared to their fellow producers across the nation.
Repeated efforts by California producers to get CDFA officials to narrow the gap between California Class 4b and FMMO Class III prices were unsuccessful, leading producers to look at the possibility of joining the federal order system. By this time (the mid-2010s), Class I utilization in California was under 20%, and quota covered less than 40% of California’s production. However, the asset value of quota still represented more than $1 billion, and a significant majority of producers owned at least some quota.
For many producers, a prerequisite to joining an FMMO was protecting the value of quota. So, Congress was approached and legislation was passed allowing USDA to establish a California FMMO that recognized the quota’s value. With a viable path forward for quota, the major California cooperatives petitioned USDA for the establishment of a FMMO.
California officials worked with producers to design a Quota Implementation Plan (QIP) that would operate after California entered an FMMO. Under the QIP, the $12 million per month needed to fund quota payments would be collected as an assessment on all Grade A milk produced in California rather than out of market-wide milk pool revenues.
The California-based co-ops had made it clear they would only support a FMMO if a referendum establishing QIP passed by a vote of the producers. That hurdle was cleared, with producers overwhelmingly approving the QIP in 2017.
When the FMMO began in November of 2018, producers began to see the actual cost of quota since it now appeared as an assessment on their milk statements. There was no difference between the quota costs prior to the FMMO . . . the costs were just more transparent, showing up on a milk statement rather than being paid out by the former California pool.