August 20, 2021 MPC Friday Report Highlights

Updated: Jan 18


 

Milk, Dairy and Grain Market Commentary By Sarina Sharp, Daily Dairy Report


There is an abundance of milk in both the United States and Europe, but momentum is slowing. In Europe and the United Kingdom, June milk collections totaled roughly 30.7 billion pounds, up just 0.7% year over year. Low-quality forage and poor on-farm economics have slowed growth in milk output. USDA’s Dairy Market News reports that milk prices “have not kept up with higher feed costs.” Some farmers are leaving the industry and the milk-cow herd is in decline in Europe’s traditional dairy regions. Flooding in Western Europe further dampened milk collections in July, but in Eastern Europe output remains strong.


U.S. milk output reached 19.1 billion pounds last month. As expected, year-over-year growth waned from an average of 3.7% in the second quarter to a stillhealthy 2% in July. Heat, humidity, and smoke clearly took a toll on milk yields in the Pacific Northwest, California, and the Southwest. Milk output continues to accelerate in the Midwest, but August temperatures have finally started to cut into milk yields in the heartland.


The U.S. milk-cow herd remains massive, at 9.5 million head, up 128,000 from July 2020. But contraction is underway, particularly in areas with big dairies – whose government payments fell well short of pandemic-era losses – and high Class I or Class IV utilization. After peaking in May, the U.S. milk cow herd declined by 6,000 head in June and another 3,000 head last month. Weekly slaughter volumes suggest the dairy herd will continue to shrink at the margins.


The combination of summer temperatures and back-to-school demand has tightened milk supplies noticeably. School milk orders could be especially strong this year. Just like the 2020-21 school year, USDA will offer free lunches with milk to all students this year. Unlike last year, most students will learn in person this year, which will presumably enhance demand for school milk cartons. Additionally, the Biden administration announced a permanent 27% increase in food stamp benefits, which is sure to boost dairy purchases at the margins. In fiscal 2019, dairy accounted for 13.5% of all purchases made through the Supplemental Nutrition Assistance Program.


Already, cheesemakers note stiff competition from Class I bottlers and say there is no spot milk to be had. In late July, cheesemakers in the Upper Midwest could buy excess loads of milk at as much as $6 per cwt. below Class III. Today, spot milk is trading at Class III to a dollar over. Tighter milk supplies are a double boon for milk powder. Balancing plants are running light, and, in the absence of discounted milk, cheesemakers are fortifying their vats with nonfat dry milk (NDM). Across the pond, European milk continues to flow into cheese vats, leaving driers with very little. European skim milk powder (SMP) exports are light, and inventories are lean. Meanwhile, global demand for milk powder remains strong. SMP values rallied 1.1% at the Global Dairy Trade auction on Tuesday. Nonetheless, CME spot NDM slipped 2ȼ this week to $1.25 per pound.


CME spot Cheddar converged this week. Cheddar blocks tumbled 12ȼ to $1.6925. Barrels climbed 2.75ȼ to $1.4775. Cheese demand is reportedly steady at restaurants and at retail. Export orders have been creeping higher, but the strong dollar is not likely to help U.S. export prospects going forward.


CME spot whey powder gained 1.25ȼ this week and closed at 53ȼ. Overall demand for whey is steady. Domestic orders are climbing, and interest in high-protein whey products is particularly strong. But exports are weakening.


CME spot butter fell 0.75ȼ this week to $1.6625. Churning is starting to slow in the Midwest as cream supplies tighten. Demand is holding, but sentiment has soured. Butter makers are clearly concerned about the impact that higher Covid counts could have on foodservice.


Class III futures took a big step back this week, as they erased some of the premium they held over the spot market. An overall selloff in equities and commodities and the stronger dollar likely also weighed. September through December Class III futures lost between 55 and 75ȼ. They are holding at $17 or better. Class IV futures were steady to a little higher, but they are still trading roughly a dollar below Class III.

 

Agriculture Secretary Vilsack Makes a Disappointing Announcement

By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs


When the pandemic hit in the Spring of 2020, nationwide stay-at-home orders greatly impacted the dairy industry along with huge sectors of the American economy. Congress responded by authorizing the expenditure of massive amounts of money to help sustain folks through what has ended up being a prolonged period of disruption. Some of the government actions with regards to dairy – done with the best of intentions (like requiring cheese, but not butter be in the Farmers to Food Box Program) – had the practical effect of creating very high cheese prices and therefore high milk prices for dairy farmers selling to cheese plants. This left behind other producers who did not have access to those windfall values, which in turn created real competitive pressures within the dairy community.


For some time now, USDA has been signaling that they were going to use some of the billions of dollars of remaining COVID relief funds to address this unequal result. USDA Secretary Vilsack went to Vermont this week to announce a program to address the issue. It is a bit complicated, and we do not have all the details yet. What USDA has announced is that “payments will reimburse qualified dairy farmers for 80% of the revenue difference per month based on an annual production of up to 5 million pounds of milk marketed and on fluid milk sales from July through December of 2020.” While we are still awaiting final details, the program seems designed to address the shortfall in fluid milk revenue that came from changing the Class I formula from being based on the “higher of” Class III or Class IV, to being based on the “average of” Class III and Class IV. See here for more information on this topic.


The payment will be based on compensating 80% of the difference between what it would have been under the “higher of” compared to what it was under the “average of.” Milk produced between July 2020 and December 2020 will be eligible. The payments will be processed through milk handlers and the payments to producers will be limited to an annual production cap of 5 million pounds, as well as subjecting producer recipients to the standard USDA Adjusted Gross Income (AGI) limits. These caps severely limit how much money California producers will receive from this program.


Here’s how the math works out for California producers:


• For the period July to December 2020, the difference between what the Class I would have been under the “higher of” formula versus what it was under the “average of” formula was $3.56 per cwt.


• There was a little over 11 billion pounds of milk pooled in the California FMMO in July through December 2020, of which about 22% was Class I milk.


• $3.56 (the difference between “higher of” and “average of”) multiplied by 22% Class I milk in the pool equals $0.78 per cwt. for all the milk in the pool, for a total revenue shortfall of $87 million for California (11 billion pounds multiplied by $0.78 per cwt.).

• Then the USDA program says its intent is to compensate 80% of that, which takes the total compensation for California down to just under $70 million.


• Dividing $70 million by the 11 billion pounds that was pooled equals $0.62 per cwt.

But then USDA says they will only cover up to 5 million pounds annual production per producer and since this program is for 6 months only, the effective cap is 2.5 million pounds.


• Bottom line, 2.5 million pounds multiplied by $0.62 equals about $15,000 per producer. If there are 800 eligible producers in California and they all get about $15,000 then that would send about $12 million to California producers instead of the $70 million before the cap.


• USDA’s announcement states that it “will provide about $350 million in pandemic assistance payments to dairy farmers.” California’s contribution to the U.S. milk supply is nearly 20%, which seems to correspond to the $70 million that California producers would receive BEFORE the cap. Given that there are many other states with large herds that will be capped out as well, it is hard to understand how USDA will distribute $350 million with these rules.


There will be more details about all this in the weeks to come, but the volume caps imposed on this program are very discriminatory against California producers who were already placed at a competitive disadvantage by USDA’s pandemic-era cheese purchasing preferences.

2021-08-20 MPC Newsletter
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