Milk, Dairy and Grain Market Commentary By Sarina Sharp, Daily Dairy Report
The bulls were put out to pasture this summer, grazing in paddocks far from LaSalle Street. But fall is here, and they are back home, enjoying a high energy ration. They frolicked through the dairy pits this week, pushing several markets to their highest price in months.
Costs are on the rise, which is weighing on farm margins and starting to slow growth in milk production. According to the Dairy Margin Coverage program’s income over feed calculation, the average dairy producer spent $12.45 on feed to produce 100 pounds of milk in August. That’s the highest national average feed cost since 2013, on the heels of the devastating 2012 drought. Even at eight-year highs, the index likely understates feed costs because it fails to account for this year’s stiff markups due to regional scarcity and expensive freight. Other costs are higher too. Wages and fuel are taking an especially big bite out of dairy producer incomes.
Rising expenses are pushing dairy producers to take a hard look at their less productive cows, and high beef prices make culling more attractive. Today, the beef check from a heavy cull cow will generally cover the cost of a springer to fill her stall. Dairy cow slaughter volumes are high and likely to remain so, which will continue to chip away at the massive milk-cow herd. That could slow growth in milk production in the months to come. But the weather has turned and milk yields are once again strong.
In Europe and Oceania, milk output has fallen short of year-ago volumes. European milk collections dropped 0.6% year-over-year in July, as the top five dairy nations logged deficits. Italy, Ireland, and Spain – ranked sixth, seventh, and eighth, respectively – are making more milk than last year, but they could not fully offset declines in Western Europe. The weather is partly to blame for the summer slowdown, but there are structural issues too. In Germany, France, and the Netherlands, some dairy producers are aging out of the business, and their younger peers are less inclined to expand amid higher costs and increasingly strict environmental regulations.
The season is getting off to a slow start down under. Australian milk collections fell 3.5% short of last year in July and dropped 3.7% in August. Across the Tasman Sea, New Zealand milk output was surprisingly weak in August, with collections down 4.2% year over year. Together, the Aussie-Kiwi deficit more than offset the increase in U.S. milk output in August. But New Zealand’s milk output likely improved in September, and South American production is going strong.
Hiccups overseas have made more room for U.S. dairy exports, which is keeping a bid under the milk powder market. CME spot nonfat dry milk (NDM) jumped 3.75ȼ this week to $1.3975 per pound, a seven-year high. USDA’s Dairy Market News reports that exporters expect higher prices will deter demand at some point, but it hasn’t happened yet. Although NDM is historically pricey, American milk powder is eminently affordable compared to foreign skim milk powder.
Butter makers are keeping product moving as retailers stock up for the holiday baking season. After scaled-down celebrations in 2020, Americans may feel a little more festive this year, which could boost cream, butter, and cheese sales. CME spot butter bounced back this week, climbing 2ȼ to $1.7475, smack-dab in the middle of the recent trading range. Advances in butter and milk powder lifted the Class IV markets. Fourth-quarter contracts closed at their highest values since June.
While the bulls had free rein of the whole dairy complex this week, they seemed especially lively in the cheese markets. CME spot Cheddar blocks leapt 14.25ȼ this week to $1.85 per pound. For the past four months, blocks have not been able to hold above $1.80 for more than a day or two at a time, but they logged three days above that mark this week. Barrels were similarly strong. They vaulted 14.5ȼ higher to $1.745.
As the Daily Dairy Report notes, “The strength in the cheese market is a bit surprising because stocks abound.” Inventories of American-style cheeses, including Cheddar, topped 823 million pounds on August 31, the largest August stockpile since 1985, when the government purchased surplus American cheese for donation. The surge in the spot market signals that fresh cheese supplies are much tighter, likely reflecting ongoing headaches in the dairy supply chain. Staffing issues continue to slow production at the margins.
CME spot whey powder rallied another 0.75ȼ this week and reached 58ȼ, a threemonth high. Robust demand for highprotein whey products has limited the share of dry whey available for the dryer.
With cheese climbing quickly and whey inching higher, the Class III markets surged. November Class III closed today at $18.20 per cwt., up an impressive $1.24 since last Friday. The other contracts moved sharply higher as well. That’s good news for dairy producers because expenses are climbing too.
CDFA Forms a Manure Recycling and Innovative Products Task Force
By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs
All California dairy farms operate with permits issued by water quality regulators. One of the major issues those permits are designed to manage is making sure that manure produced on the dairy is handled in such a way as to not impair water quality. The primary way most dairies in the state comply with those water quality regulations is to utilize the manure as fertilizer for growing crops. Getting that balance right, for all dairies everywhere in the state, is a huge challenge. Competing uses for crop land and now the limits to pumping groundwater as a result of the Sustainable Groundwater Management Act have heightened the attention to the fact that there is very likely a manure surplus on many California dairies.
California Agriculture Secretary Karen Ross has just appointed a multi-disciplinary task force made up of dairy farmers, and industry representatives along with the fertilizer and soil amendment industry, university researcher representation, agronomists, various sustainable farming, and water quality interests as well as government agencies with air, climate and water regulating responsibilities to tackle this issue head on. The two co-chairs of the task force will be J.P. Cativiela, Administrator of the Central Valley Dairy Representative Monitoring Program, and Ryan Flaherty from Sustainable Conservation. The Task Force goals are ambitious but important. They include:
• Increase the understanding of the scale and distribution of nitrogen surplus on dairies and potential demand from other crops for nitrogen and other manure nutrients.
• Identify research, technical and policy actions that encourage innovations to recycle surplus nutrients for use in agriculture; creating a circular fertilizer/soil amendment economy that builds healthy soils, conserves and protects water, and makes the state’s agriculture more sustainable.
• Organize short-, mid- and long-term potential solutions and create a roadmap for continued progress, including estimates of time and resources necessary to achieve research, policy, technological development, and educational/outreach objectives.
• Identify realistic and obtainable market-based outcomes to incentivize legislative action and investment.
Having CDFA put its official stamp on this task force as well as dedicating state time and resources to addressing the manure challenge for the California dairy industry is a very important step. As we look forward as an industry, finding an economically viable answer to handling surplus manure is a crucial part of enabling the flourishing of the California dairy industry over the long term. MPC applauds Secretary Ross for this action and looks forward to being a constructive partner in this effort.