Milk, Dairy and Grain Market Commentary By Sarina Sharp, Daily Dairy Report
The U.S. dairy industry has expanded cheese processing capacity noticeably, and it shows. Cheese output soared to an all-time high of 1.18 billion pounds in March, up 4.8% from the prior year. Cheddar production jumped 7.8%. After several months in decline, Mozzarella output also exceeded that of last year, confirming reports of better demand from foodservice. The flush has accelerated since then, and, according to USDA’s Dairy Market News, cheese makers are “busy.”
Consumers are hungry for high protein products, and manufacturers are happy to oblige. They are directing much of the whey stream into whey protein concentrates and isolates, leaving less for the drier. Despite formidable cheese output, dry whey production was only 1% greater than the prior year. Whey powder stocks declined significantly in March and fell 13.7% below year-ago levels.
Sky-high milk production and lofty components added up to a flood of cream. U.S. cream output reached nearly 792 million pounds in March, an alltime high. But a growing share went to ice cream and cheese, leaving less for butter churns. Butter output slipped to 198.9 million pounds, down 0.6% from March 2020. Churns were also a little less active than usual in the past few weeks. Dairy Market News reports that as ice cream makers ramp up, “Cream is tightening, but not tight.”
Driers ran hard. Combined production of nonfat dry milk (NDM) and skim milk powder (SMP) reached 236.5 million pounds, the highest March tally on record and 3.1% more than the prior year. But, thanks to massive exports, manufacturers stocks of NDM declined nearly 27 million pounds from February to March, the largest March drawdown since 1952.
Amid rapid growth in milk production, exports are vital to keeping U.S. dairy product inventories from piling up. Thankfully, with stocks in Europe and New Zealand largely committed, the world is hungry for American goods. Despite the container shortage, a lack of truck drivers, and lineups at the ports, U.S. NDM exports reached an all-time high of 190.8 million pounds, up 38.8% from March 2020. After several slow months, Mexico was back in the game, and shipments to Asia are still going strong. Algeria and Egypt stepped up imports of American milk powder. The fact that we’re sending product to North Africa, practically in Europe’s backyard, is a testament to the affordability of U.S. product. Global milk powder values continue to rise and the dollar is weakening, offering support to U.S. prices. At the Global Dairy Trade auction on Tuesday, SMP rallied 2% to the equivalent of NDM at $1.66 per pound.
Whey powder exports also impressed. They climbed to 52.7 million pounds, up almost 38% year over year. Cheese exports improved to 81 million pounds in March, up 11% from a year ago and the highest monthly volume since June. More recently, Dairy Market News relayed increased interest from Chinese buyers for U.S. cheese. Butterfat exports climbed in March, but so did imports.
Butter bounced back at the CME spot market, but the other products faded. Spot butter rallied 1.75ȼ this week to $1.77 per pound. Powder slipped a quarter-cent from last Friday’s six-year high and closed today at $1.3225. Although demand for protein and powders is robust, whey prices faltered. CME spot whey fell 3.25ȼ to 62.75ȼ. Cheddar barrels scored a fresh 2021 high on Wednesday but then dropped precipitously. They closed today at $1.7275, down 10.75ȼ this week. Blocks lost 5.25ȼ and finished at $1.7475.
The spot market setbacks weighed heavily on nearby Class III futures. The June contract fell 97ȼ to a still lofty $18.89 per cwt. and July Class III settled 66ȼ in the red. Most Class IV contracts sustained modest losses. June was hardest hit. It fell 27ȼ to $16.75.
Class I Controversy Update
By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs
When USDA last performed a major overhaul of the FMMO classified milk pricing formula in the year 2000, it created separate formulas for Class III (milk used for cheese and whey) and Class IV (milk used for butter and powder) based on the market values for those products. It established a Class II price based on a differential that is added to the Class IV value and it established a Class I price based on the “higher of” either the Class III value or the Class IV value. In its justification for why it picked the “higher of,” USDA said:
“Because handlers compete for the same milk for different uses, Class I prices should exceed Class III and Class IV prices to assure an adequate supply of milk for fluid use. Federal milk orders traditionally have viewed fluid use as having a higher value than manufacturing use. The replacement Class I price mover reflects this philosophy by using the higher of the Class III or Class IV price for computing the Class I price.”
Setting Class I prices using the “higher of” continued until 2019 when Congress instructed USDA to change the Class I mover to use an “average of” Class III and Class IV values, and add an additional $0.74 per cwt. to the price. This Congressionally mandated change was done at the request of the National Milk Producers Federation (NMPF) and the International Dairy Foods Association (IDFA). These are the two main national dairy industry groups representing producers and processors, respectively. IDFA had approached NMPF and asked for the change because it asserted that the “higher of” made risk management difficult for Class I handlers. NMPF agreed to the change in exchange for the $0.74 per cwt. bump in the Class I price. The $0.74 approximated what the “higher of” factor generated over what the price would have been if the “average of” had been in place since 2000. The idea was to make the change from “higher of” to “average of” revenue neutral to producers.
Then the pandemic hit. Class III prices soared and Class IV prices languished. Suddenly using the “average of” instead of the “higher of” began costing producers real money. It also increased the incentive for Class III handlers to de-pool their milk, thereby increasing negative Producer Price Differentials (PPDs) for those remaining in the Federal Order pool. While the spread between Class III and Class IV is narrowing, the “average of” is still yielding a lower Class I price than the “higher of” would have generated.
Producers want change, but IDFA is saying no. Some view this response by IDFA as bad faith. When processors had a problem with risk management, they asked the producers for help and producers did help with the understanding that they would be essentially held harmless by the change. The producers have now been harmed, not only by losing out on Class I revenue, but also because large negative PPDs undermine producer risk management tools and IDFA is not willing to cooperate in addressing the producers’ problem.
So where does this leave us? The NMPF board voted to petition USDA for a hearing to consider changing the Class I formula. Its proposal would continue with the "average of" either the Class III or Class IV price and increase the adjuster from the current addition of $0.74 per cwt. to whatever the average of the last two years would have been. Since the last two years includes 2020 the adjuster under this proposal would go up to about $1.60 for the next two years. NMPF proposes to floor the adjuster at $0.74 per cwt. and recalculate the number every two years.
Additionally, four Midwest dairy producer groups put out a press release proposing a slightly different approach. The groups want to change the Class I adjuster from the "average of" Class III and IV to be exclusively based off the Class III price. However, this proposal does not completely ignore the Class IV price. It calls for an annual adjustment based on the trailing three years of spreads between Class III and Class IV. So, when Class IV is higher than Class III, that information is captured in the adjuster for the next year. This proposal also does away with advanced Class I prices.
There is another group led by the American Dairy Coalition that is leaning toward supporting simply going back to the "higher of.” There is also talk of asking USDA to allocate some of the remaining pandemic relief funds directly through the Federal Milk Marketing Orders to more specifically compensate producers who stayed in the pool.
Meanwhile, Secretary Vilsack was quoted during a recent presentation to the North American Agricultural Journalists saying, “I know that within the dairy industry there are conversations, and I think those conversations need to mature a bit more before anybody makes a decision that there’s going to be a significant change.”
The current status of the issue: IDFA is opposed to a change and dairy producers are not in agreement.
In other news, Hilmar Cheese Company announced earlier this week that it will build a new cuttingedge cheese and whey production facility in Dodge City, Kansas.