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June 18, 2021 MPC Friday Report Highlights

Updated: Jan 17, 2022


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

The dairy markets were awash in red ink this week. June Class III milk gained a little ground, but all other Class III and Class IV contracts finished sharply lower. July Class III lost 81ȼ and closed at $16.72 per cwt. The August contract plummeted $1.18. Most Class IV contracts lost between 25 and 45ȼ.

For months, high feed costs have propped up second-half futures, based on the theory that poor margins would reduce milk output eventually. Now, the trade seems to be questioning that theory – and with good reason, given the size of the dairy herd – and concentrating on more immediate supply issues. There is milk in abundance, and it’s weighing on dairy product prices.

After a few hot weeks, stress is starting to sap milk yields. Nevertheless, there is more milk than manufacturers can accommodate in the Southwest and mountain states despite supply management programs. In the Upper Midwest, dairy producers have added cows sufficient to fill up new cheese processing capacity and then some. Excess milk is selling in the region for $4 to $6 under class. In the rest of the nation, there is still no shortage, and cooler weather is on the way nearly everywhere except California.

The cheese markets are looking especially weighed down by overproduction. Traders exchanged 56 loads of fresh Cheddar in Chicago this week, pushing a lot of product through the market of last resort. CME spot Cheddar blocks slipped 0.75ȼ to $1.4925 per pound. Barrels fell 13ȼ to $1.5425. Cheap milk is pushing some Midwest cheese plants to run at “max capacity,” according to USDA’s Dairy Market News. Meanwhile, “demand is mixed.”

Under pressure from abroad, CME spot nonfat dry milk (NDM) fell 3.5ȼ this week to $1.265. Powder values faded at the Global Dairy Trade auction, where skim milk powder (SMP) dropped 1.7% to the equivalent of (NDM) at $1.62 per pound. Big moves in the currency markets also weighed on the most export-dependent of the U.S. dairy commodities. On Wednesday, Federal Reserve officials offered a more optimistic economic outlook and hinted at the possibility of a slightly tougher stance on inflation. That prompted a dramatic turnaround in the dollar, which had been languishing at multi-year lows. Over the past three trading sessions, the U.S. dollar index rallied 1.9% against a basket of foreign currencies, a massive move in the generally stolid forex market. The stronger dollar makes U.S. NDM more expensive when priced in weaker foreign currencies. The snarled supply chain is not helping matters. The container shortage and port backlogs continue to slow exports, while a lack of truck drivers has delayed domestic shipments.

Ever the contrarian, the whey market softened early in the week but made a strong showing on Friday. Still, CME spot whey finished 1.75ȼ lower than it was last Friday at 61ȼ. Buyers continue to balk when prices top 60ȼ, but stocks are tight, and sellers feel no pressure to lower their sights. High-protein whey products continue to sell at a good clip, mostly to foreign buyers. Although the strong dollar may trim whey exports at the margins, it is less of an issue for whey than for many other products, because China’s yuan is strengthening even more quickly than the greenback.

Butter started strong but faded throughout the week. It closed today at $1.785, down 0.75ȼ. Cream is plentiful and churns are running. Retail orders are starting to fade, but foodservice demand remains strong. European butter prices also softened, especially when adjusting for the currency effect. While benchmark German butter prices fell 1.7% in euro terms this week, they fell 3.7% when converted to dollars.


USDA Announces Pandemic Aid for Dairy Farmers – and a Suggestion

By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs

On June 15, 2021, USDA announced its intention “to address a number of gaps and disparities in previous rounds of aid” with remaining funds allocated by Congress for Coronavirus Relief. Relative to dairy, three initiatives were mentioned. The first is $400 million for the Dairy Donation Program. The second is $580 million for enhancements to the Dairy Margin Coverage program, which is targeted to a dairy farmer’s first 5 million pounds of production per year. The third and most interesting initiative is “Additional pandemic payments targeted to dairy farmers that have demonstrated losses that have not been covered by previous pandemic assistance.”

During the pandemic, a couple of government actions, done with the best of intentions, created huge disparities in what different dairy farmers got paid for their milk. Back in 2019, Congress instructed USDA to change the Class I formula. The base Class I price went from using the “higher of” either the Class III (cheese/whey) or Class IV (butter/powder) values, to a formula using the “average of” the Class III and IV values, plus an adjuster that was designed to make the change “revenue neutral.” When Class III prices skyrocketed about mid-year in 2020 due to massive government stimulated purchases of cheese for the Farmers to Food Box program, Class I prices lagged behind because they were now based on the “average of” instead of the “higher of.” The resulting lower Class I values generated hundreds of millions of dollars less in Class I revenue than the “higher of” formula would have produced. Cheese plants and the cooperatives who supplied them, for the most part, dropped out of the Federal Order pools, deciding to keep the money instead of sharing it. This contributed to massive negative Producer Price Differentials and very different milk prices for farmers in the same market depending on where their milk was sold. This magnitude of milk price disparity is very destabilizing in the dairy producer community.

While USDA announced their intention to make targeted additional pandemic payments, there were no details given by USDA this week for how these additional targeted pandemic payments would be calculated. But recently, USDA received a written suggestion from Florida dairy farmer Joe Wright that deserves serious consideration. The dairy farmers most hurt by the milk price disparities of the pandemic were dairy farmers who participated in the Federal Orders. Handlers kept almost all the high cheese milk dollars out of the Federal Order pools while the producers who provided the rest of the milk stayed in the Federal Order pools. Those who stayed in bore the brunt of the low Class I prices. USDA keeps records of which producers associate with the Federal Order pools each month. It is also possible to calculate the difference between what Class I prices would have been under a “higher of” formula as opposed to the “average of” Class I formula that was in place. Industry estimates put that number at close to $750 million.

It seems then that one approach USDA should take is to provide a mechanism for producers to make a claim for additional pandemic payments based on the milk they pooled in the Federal Order during the pandemic period. In this way, the additional pandemic payments would be targeted to those who were most impacted by the lower Class I prices and missed out on the benefit that the massive government stimulated purchases of cheese created. Targeting the payments to those who stayed in the pool would go a long way toward righting an inequity, that while unintentional, was very consequential and destabilizing in the dairy community.

2021-06-18 MPC Newsletter
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