Milk, Dairy and Grain Market Commentary By Sarina Sharp, Daily Dairy Report
Although summer is off to a sweltering start in much of the nation, there is still plenty of milk. In the Upper Midwest, excess tankers are selling at $5 to $6 under class, and cheese plants are running full throttle. Thankfully, demand is strong. Retailers continue to place big orders, and foodservice demand is generally steady. Exports are booming. The U.S. sent a record-shattering 89.1 million pounds of cheese abroad in April, up 51% from a year ago. USDA’s Dairy Market News reports that lower prices today are attracting more orders, and Asian buyers are particularly happy to bargain shop.
Still, there is plenty of fresh cheese to be had. Processors unloaded 52 cars at the CME spot market this week. Blocks held steady near 13-month lows at $1.50 per pound. Barrels ascended again. They added 5.75ȼ from Friday to Friday and reached $1.6725. The futures were unimpressed. There is quite a gap between the CME spot Cheddar average and July cheese futures. Spot Cheddar will have to strengthen to forestall a selloff in nearby cheese and Class III futures.
CME spot whey powder bounced back this week, climbing 2.5ȼ to 62.75ȼ. Demand for high-protein whey products remains robust, which is keeping dry whey output in check despite formidable cheese production. U.S. whey protein concentrate exports are off to their strongest start on record, and shipments of whey protein isolates to foreign buyers jumped 13.3% from 2020 in January through April. But whey exports are starting to slow. Backups at the ports, a shortage of shipping containers, and stiffer competition from Europe are taking a toll. Closer to home, some buyers have balked at historically high prices. However, whey powder stocks remain tight.
The Class IV products moved higher. CME spot butter rallied 1.75ȼ to $1.7925. Cream is plentiful, particularly in the West. Foodservice orders continue to climb, but retail butter demand has softened. U.S. butter exports leapt more than three-fold in April to the highest monthly volume in nearly seven years. That helped the U.S. to flip to a net butter exporter in April, although, at 1.85 million pounds, the trade surplus remains relatively small.
CME spot nonfat dry milk (NDM) jumped 4ȼ this week to $1.30. As usual, the tail end of the spring flush has collided with the summer slowdown in school milk programs, and dryers are running hard. Domestic users have been buying opportunistically, stepping up purchases when the price ticks down, and then backing off again as values rise. U.S. NDM exports fell short of the record volumes set in March but were still 16% greater than those of April 2020. China remains hungry for foreign milk powder, and shipments to Mexico accelerated. Industry contacts suggest that NDM sales to Mexico are likely to remain strong.
Nearby Class IV futures moved a little higher this week, and the September contract jumped 27ȼ. The futures project that Class IV values will inch higher through the rest of the year. Prices range from $16.56 per cwt. in June to $17.70 in December. Class III futures fell back, helping to close some of the gap between the low spot cheese market and loftier futures. Most contracts lost just a few cents, but the July contract fell 33ȼ to $17.53. August through December futures are trading well north of $18.
In a normal year, $17 and $18 milk is more than enough to pay the bills. But amid higher feed costs, rising wages, and a trucker shortage, expenses are adding up quickly. Losses are accumulating, especially for those producers who suffered from last year’s depooling and this year’s spike in feed costs. In recent weeks there have been noticeably more heifers for sale, and more chatter about dairy producers ready to exit the business, either due to their own fatigue or at the behest of their banker. But there are also expansions underway, and dairy producers in regions with onerous supply management programs stand ready to fill any vacuums left by their peers who sell out. In some cases, the cows will simply move a few miles down the road, and the milk will keep flowing. In others, dairy producers who have been held back by base programs will be given the opportunity to step up milk yields incrementally as their neighbor makes room. We’re likely to hear of more sellouts in the near future, but the U.S. dairy herd is massive, and it will take many months of red ink to push milk production noticeably downward.
Madera County Groundwater Sustainability Agency Makes a Big Decision
By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs
During the last big drought in 2014, the California Legislature passed the Sustainable Groundwater Management Act (SGMA). This historic law mandated that all groundwater in California come under the jurisdiction of the government (California was the last western state to adopt regulations for the pumping of groundwater).
The purpose of the law is basically to eliminate overdraft, that is, the pumping of more water out of the ground than the amount that is recharged, either naturally or intentionally. The law wisely places the primary responsibility for regulating groundwater in the hands of local government entities, with the state reserving authority to step in if the locals fail to do the job. It also recognized that it would take a long time to bring the groundwater resources of California into sustainable balance. The target deadline for sustainability is the year 2040, however steady progress must be demonstrated in the meantime.
A lot has been accomplished in the last six years. During that time, all of California’s groundwater was covered by hundreds of newly formed Groundwater Sustainability Agencies (GSAs). All the subbasins designated as “critically overdrafted” by the state submitted legally required Groundwater Sustainability Plans (GSPs) by the January 31, 2020 deadline. The GSAs are now implementing those plans, and the impact of those plans on local farmers is directly proportional to the amount of surface water available to that local area. As areas formed GSAs, there was a tendency by water districts with surface water rights to form a GSA that covered just their jurisdiction, leaving undistricted land to fend for itself. In some areas – Madera County being a prime example – the land not in surface water districts ended up being bunched together in a GSA with the county government responsible for providing SGMA coverage.
The Madera County GSA encompasses about 233,000 acres in three subbasins. It has 185,000 acres in the Madera Subbasin of which 85,000 acres are irrigated. It has 45,000 acres in the Chowchilla Subbasin of which 38,000 are irrigated and there are 3,000 acres in the Delta Mendota Subbasin of which 2,100 are irrigated. The Madera County GSA has been granted 90,000 acre-feet of annual “sustainable yield” in the Madera Subbasin and 22,500 acre-feet of annual sustainable yield in the Chowchilla Subbasin. In addition, the GSP grants access to “transition water” in each subbasin. Transition water is overdraft that is allowed as the GSA moves to a sustainable condition by 2040. It is a declining amount of water that, for a fee, will be available to farmers to cushion the curtailing of groundwater pumping.
The issue the Madera County Board of Supervisors – acting as the governing board of the Madera County GSA – had to deal with this week is how to allocate the sustainable yield and the transition water to the acres in the GSA. Would they allocate it to every acre or just to the irrigated acres? In the Madera Subbasin portion of the GSA, there are about 100,000 acres of unirrigated land in addition to the 85,000 acres of irrigated land. Allocating groundwater to the unirrigated lands would greatly reduce the amount of water available to the irrigated lands and would necessitate the establishment of a mechanism to enable that allocated water to be transferred to the irrigated acres that need it.
Representatives of the unirrigated lands made their case to the Board that fairness dictated that everyone should get a share of the water allocation. Others made the case that the purpose of the transition water is to soften the economic impact irrigated agriculture faces in ramping down groundwater usage to sustainable levels. It was a very tough political call for the Supervisors. A motion was made to allocate the sustainable yield and the transition water to irrigated acres only, with some instructions to county staff to work with the dairy industry in providing some timing flexibility to the ramp down schedule. This was noted due to the reality that dairies operate under Nutrient Management Plans tied to specific farmable acres and a reduction of those acres will cause permit compliance issues with the Central Valley Water Quality Control Board.
The motion passed unanimously. It was a very hard decision for the Board to make – politicians do not like votes that will displease some of their constituents. SGMA forces local officials to either make these decisions or the state will come in and take over. Now that the decision has been made to allocate pumping amounts to irrigated farming, making a water supply budget becomes possible and creating the opportunity to receive groundwater credits for supplemental recharge projects also becomes possible.
SGMA is a game changer in the Central Valley. Very dry years add pressure and stress to an already difficult situation. A lot has changed since the last drought. We have a plan and communities are working to implement their plans. It requires more infrastructure to capture more water when we have wet years and a steady calm when the inevitable dry period comes our way. Droughts are to be expected in California. We must do better in the wet times to get us through the dry times. That is the message we need our leaders to understand. This week, it was the Madera County GSA’s turn to make a courageous and difficult decision. They met the moment.