Milk output tightening

Milk output tightening

IN the dairy markets last week, butter continued its long, slow decline from last fall, but cheese finally reversed its comparable long, slow decline from the beginning of the quarter.

Butter was $1.55/lb. in cash trading at the Chicago Mercantile Exchange last Thursday, down 4.5 cents from the week before and down 40 cents from October, 2.8% lower than at this time last year.

Barrel cheese was $1.65/lb. in cash trading at the exchange, gaining 2.5 cents from the week before but still down 40 cents from October, and blocks were $1.74, gaining 1.5 cents from the week before but still down 36 cents from October. Barrels and blocks were 6.5% and 11.4% more than year ago.

The cheese move suggested that cheese has hit bottom and that butter is probably finding its own floor and may turn higher in one of the next sessions, according to Feedstuffs sources.

However, milk production is increasing in the eastern and midwestern milk states, leaving lots of cream available to make butter in the first quarter of next year. Also, the solids content is above historical levels, leaving lots of potential to make cheese in the next several weeks.

Accordingly, butter and cheese prices still may waiver for a few weeks, sources said.

At the same time, decreased production of milk -- and cream and solids -- is on the way, setting up a good rally for late in the first half of next year and through the second half, sources said.

Analyst Jerry Dryer, whose reports are available at www.dairymarketanalyst.com, outlined a perfect storm: Dairy producers have responded to record-high corn, hay and other production costs and low milk payments -- which are largely due to the butter and cheese price slides -- by significantly culling herds and running through replacements.

Furthermore, beef prices are so high that cow/calf producers are starting to rebuild the beef cow herd, which has made cull dairy cow prices so high that dairy producers will continue to remove cows from the parlors and send them to the plants.

Producers also are starting to feed 2012 corn silage and other drought-stressed feedstocks.

Accordingly, the dairy cow herd and milk production will be smaller than year ago for some time, Dryer said.

The dairy cow cull "is impressive" for its size, Sarina Sharp at the California Milk Producers Council added, noting that hay costs were already record high last spring before last summer's drought ran them even higher (Figure). Midwestern hay prices have increased 61% since May.

Rabobank International, in a recent report, supported those observations by Dryer and Sharp.

The recovery in milk prices that had been expected in the current fourth quarter did not occur, the report notes, explaining that while milk production has started to contract, consumption has been weaker than expected, and end users had accumulated butter and cheese inventories during periods of low milk prices in the first and second quarters.

Now, though, the report says, milk production will continue to decrease, and end users will merchandise through their inventories and re-enter the marketplace.

The market appears to be heading for "a significant tightening" in the first half of 2013, the report says, and milk checks will increase, as will prices for butter, cheese and other products.

In its supply and demand estimates two weeks ago (Feedstuffs, Dec. 17), the U.S. Department of Agriculture forecasted milk production for 2013 to be 199.7 billion lb., which will be unchanged from this year and the first time since 2009 that there will be no increase in production.

USDA forecasted an all-milk price of $19.15-19.95/cwt. next year, compared with $18.55 this year, and put butter and cheese prices at $1.595-1.705/lb. and $1.750-1.830/lb., compared with $1.60 and $1.71 this year.

Those prices will show up in the retail dairy case, with USDA forecasting a 4.0% increase in the consumer price index (CPI) for dairy products next year, which will be on top of a 2.5% increase this year and a 6.8% increase last year (Table).

Across the livestock and poultry sectors, producers have been cutting production for several years in response to record-high corn and other feed ingredient prices brought on by demand for corn for ethanol production and last summer's yield setbacks due to the drought.

Total meat and poultry production will be lower next year, something that has happened only one other time since 1980.

Consumers will pay for this, too. The CPI for all meat, poultry and fish, for instance, will increase 3.5% next year after increasing 5.0% this year and 7.4% last year.

By category, the CPI will increase similarly for beef, pork, poultry, eggs and fish. The CPI for bakery products and cereals -- categories that are heavily affected by corn and wheat prices -- will also increase next year after increasing this year and last year.

So far, consumers have not resisted these higher prices, as reflected in consumer demand indexes showing that demand has held steady and even increased for beef and turkey, but the markets are getting nervous about how much more consumers can or will take, cautioned John Anderson, American Farm Bureau Federation deputy economist.

The economy needs to improve, he said in remarks to the annual meeting of the Mississippi Farm Bureau last week. If the economy does give consumers more confidence, the higher retail-level prices will work, he said; if it doesn't, the markets will be confronted with another issue that could set back production even more.

 

Consumer price index (CPI): Changes in food prices

 

2009

2010

2011

2012

2013

Category

-% change from previous year-

All food

1.8

0.8

3.7

3.0

3.5

At-home food

0.5

0.3

4.8

3.0

3.5

Away-from-home food

3.5

1.3

1.9

2.5

3.0

Meat, poultry, fish

0.5

1.9

7.4

5.0

3.5

Meat

-0.6

2.8

8.8

5.0

3.5

Beef and veal

-1.0

2.9

10.2

6.0

3.5

Pork

-2.0

4.7

8.5

1.5

3.5

Other meat

2.3

-0.1

6.4

3.0

3.5

Poultry

1.7

-0.1

2.9

5.5

3.5

Fish and seafood

3.6

1.1

7.1

3.0

3.0

Dairy products

-6.4

1.1

6.8

2.5

4.0

Eggs

-14.7

1.5

9.2

3.0

3.5

Fruits and vegetables

-2.1

0.2

4.1

-1.5

3.5

Fresh fruits and vegetables

-4.6

0.6

4.5

-2.5

4.0

Fresh fruits

-6.1

-0.6

3.3

-1.5

3.5

Fresh vegetables

-3.4

2.0

5.6

-4.5

4.5

Processed fruits and vegetables

6.6

-1.3

2.9

3.5

2.5

Bakery products and cereals

3.2

-0.8

3.9

3.0

3.5

Fats and oils

2.3

-0.3

9.3

5.5

2.5

Sugars and sweets

5.6

2.2

3.3

2.5

2.5

Other foods

3.7

-0.5

2.3

3.5

4.0

Note: 2012 and 2013 are estimates. Percentages in bold represent changes from previous CPI.

Source: U.S. Economic Research Service.

 

Volume:84 Issue:53

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