Class III futures remain solid

The “Mielke” Market Weekly

The farm benchmark milk price took a temporary step backward in July on a slightly lower cheese price. The U.S. Department of Agriculture announced the July Federal Order Class III price at $19.79 per hundredweight, down 8 cents from June, but $6.02 above July 2023. The seven-month average stands at $17.33, up from $16.95 this time a year ago and $22.89 in 2022.         

Late Friday morning Class III futures portended an August price at $20.34; September, $20.51; October, $20.61; November, $20.20; and December, $19.45.

The July Class IV price is $21.31, up 23 cents from June, $3.05 above a year ago, and the highest since October 2023. The seven-month average at $20.33, is up from $18.55 a year ago and compares to $24.83 in 2022.

Cash cheese prices weakened as traders awaited the August 5 June dairy products report. StoneX’s “Early Morning Update” pointed out “Slightly weaker milk production along with a small slowdown in fat content and the better cheese production limit the amount of fat left for butter production. It adds that Class I demand is starting to pick up as schools get closer to resuming.

After gaining 6.5 cents the previous week, Cheddar block cheese climbed to $1.95 per pound Monday but closed Friday at $1.85, down 8 cents on the week, 5 cents below where they were July 1, and 11.5 cents below a year ago.  

The barrels got to $1.9875 Tuesday, the highest since June 17, but closed at $1.93, 4 cents lower on the week, 7.75 cents above their July 1 price, 15.50 cents above a year ago, and 8 cents above the blocks. Sales totaled four cars of blocks on the week and 58 for the month of July, down from 71 in June. Barrel sales totaled four for the week and 80 for the month, up from 55 in June.

Central region contacts tell Dairy Market News that retail demand for cheese is steady but  food service purchasing is soft. Export demand is steady. Cheese inventories are somewhat tight in the Central region and cheesemakers are running active schedules, though some note tightening milk availability is contributing to lighter output. Class III milk prices in the Central region ranged flat to $2.00-over Class, compared to $6-under to flat Class III a year ago. 

Cheese production is seasonally weakening in the West. Class III milk demand is strong from cheese manufacturers. However, milk availability is tighter throughout the region. Domestic cheese demand varies from steady to lighter, according to DMN.

Butter continues to impress, closing at $3.1050 per pound, up 1.5 cents on the week, 3.25 cents below its July 1 post, but 48.5 cents above a year ago. Sales totaled 39 for the week and 137 for the month, up from 44 in June.

The Central region reports that butter demand from retail purchasers is steady, though food service sales are softening. Week-to-week butter sales are steady, however retail butter purchasers have been ordering more butter compared to a year ago. Cream volumes continue to tighten in the Central region as milk production is declining. Butter makers are utilizing cream to run busy schedules, and some say they continue to source cream from the West.

Butter production is generally weakening in the West. Some manufacturers indicate bulk production is especially light while others convey production is within anticipated seasonal trends and comfortable. Some butter producers continue to build inventory to cover anticipated fourth-quarter demand. Cream is tight in the region, but demand is mixed. Stocks are comfortable. Domestic demand varies from somewhat stronger to slightly weaker, according to DMN.

Grade A nonfat dry milk saw its highest Chicago Mercantile Exchange price since Feb. 13, 2023, on Thursday, hitting $1.2475 per pound, but closed Friday at $1.24, still 0.75 cents higher on the week, 6 cents above its July 1 perch, and 11.5 cents above a year ago. Sales for the week totaled 25, and 76 for the month, down from 84 in June.

Dry whey hit 62.5 cents per pound Thursday, the highest CME price since April 22, 2022, but closed Friday at 61 cents, up 4 cents on the week, 12 cents higher on the month, and 33.75 cents above a year ago. There were five sales for the week and 11 for the month of July, down from 13 in June.

StoneX stated in its July 31 “Early Morning Update;” “There is continued demand for whey protein concentrates and isolates, which in turn has concentrated efforts on better production of those products. But the key to the story here at the end of July is an aggressive bid for more base proteins as well. While there are reports of some constraints on the supply side for dry whey, the recent rally seems driven in large part by demand. Demand for spot loads, but also for futures. Open interest on futures contracts, the amount of positions which traders/hedgers, etc. have open in the market, is down 28% from this time last year. It may not be a huge leap to suggest that some participants are in the midst of a scramble for coverage as concerns over supply underpin.”

Meanwhile, a higher all-milk price and lower corn, soybean, and hay prices gave another lift to the milk-feed price ratio. The latest Ag Prices report shows the June ratio at 2.36, up from 2.24 in May, and compares to 1.35 in June 2023.

The index is based on the current milk price in relationship to feed prices for a ration consisting of 51% corn, 8% soybeans and 41% alfalfa hay. One pound of milk would purchase 2.36 pounds of dairy feed of that blend.

The all-milk price averaged $22.80 per cwt, with a 4.10% butterfat test, up 80 cents from May, and $5 above June 2023, which had a 4.01% test.

California’s average, at $21.80 per cwt, was up $1.10 from May and $4.30 above a year ago. Wisconsin’s, at $22.10, was up 80 cents from May and $5.70 above a year ago.

The national corn price averaged $4.48 per bushel, down 3 cents from May, after jumping 12 cents the previous month, and was $2.01 below a year ago. 

Soybeans averaged $11.80 per bushel, down a dime from May and $2.40 per bushel below a year ago. 

Alfalfa hay averaged $195 per ton, down $7 from May and $68 per ton below a year ago.

Looking at the cow side of the ledger; the June average cull price for beef and dairy combined climbed to $138 per cwt, up $6 from May, $31 above June 2023, and $66.40 above the 2011 base average.

Milk production margins moved to the highest level since April 2022 at $13.15 per cwt. and were 98 cents per cwt. above May, according to dairy economist Bill Brooks, of Stoneheart Consulting in Dearborn, Missouri.

“Income over feed costs in June were above the $8 per cwt level needed for steady to higher milk production for the 10th month in a row,” says Brooks. “Input prices were lower in June with all three input commodities remaining in the top nine for June all-time. Feed costs were the ninth highest ever for the month of June and the 78th highest of all time. The all-milk price moved into the top 25 all-time at the 25th highest recorded.”

“Dairy producer profitability for 2023 in the form of milk income over feed costs, was $8.01 per cwt. The profitability was $3.90 below 2022 and $1.71 lower than the 2018-22 average. In 2023, the decrease in milk income over feed costs was a result of the milk price decreasing more than feed prices dropped. Income over feed in 2023 was around the level needed to maintain or grow milk production.”

“Milk income over feed costs for 2024 (using July 31 CME settling futures prices for Class III milk, corn, and soybeans plus the Stoneheart forecast for alfalfa hay) are expected to be $13.55 per cwt, a gain of 53 cents per cwt versus last month’s estimate. Income over feed would be above the level needed to maintain or grow milk production, and up $5.54 per cwt from 2023.”

Milk income over feed costs for 2025 are expected to be $13.38 per cwt, says Brooks, a loss of 17 cents per cwt versus 2024 and income over feed would be above the level needed to maintain or grow milk production, and up 52 cents per cwt from last month’s estimate, he said.

The latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC said; “Dairy margins improved over the last half of July with higher milk prices as feed costs held steady. CME Class III milk futures have been supported recently by strength in the whey market, with USDA reporting that China’s June whey imports were up 6.2% from 2023 and shipments from the U.S. up 33.9% from last year.”

“CME cash whey finished the month at a new 15-year high for this point in the calendar year at 62 cents per pound, which is up 2.25 cents or 57% from the end of May,” according to the MW. “Each penny increase in the price of whey adds about 6 cents to the Class III milk price, so whey has been a significant contributor to recent strength in the market.”

The MW also reported highlights from the June milk production report, citing “Significant revisions to the dairy herd, estimated at 9.335 million head at the end of June, down 62,000 from last year and 9,000 lower than May. Due to limited availability, heifer replacement calves are fetching over $3,000 so dairy producers are holding onto their cows longer which is impacting yields.”

“USDA reported milk yield at or below a year ago in two-thirds of the largest 24 dairy states, including states that did not suffer from a heat wave or avian influenza during June.” The MW concluded, reporting on the June cold storage report, and said; “Our clients have continued extending coverage in deferred marketing periods with new positions to take advantage of historically strong margins.”

In more evidence of producers holding onto their cows longer, dairy cow slaughter for the week ending July 20 totaled 52,200 head, down 300 from the previous week, and 9,000 or 14.7% below a year ago. Year to date, 1,793,000 dairy cows have been culled, down 259,400 or 14.5% from 2023.

USDA’s latest crop production report showed 77% of U.S. corn was silking as of the week ending July 28, up from 61% the previous week, 2% behind a year ago, and 1% ahead of the five-year average. Thirty percent was at the dough stage, 5% ahead of a year ago, and 8% ahead of the five year average. Sixty-eight percent was rated good to excellent, up 1% from the previous week and compares to 55% a year ago.

Seventy-seven percent of the soybeans are blooming, up from 65% the previous week, 2% behind a year ago, but 3% ahead of the five year average. Forty-four percent were setting pods, down 2% from a year ago but 4% ahead of the average. Sixty-seven percent were rated good to excellent, down 1% from the previous week, but up from 52% a year ago.

There’s been a lot of frustration in the global dairy market over China’s lack of purchases and a big part of the reason is China’s increased domestic milk production. Rabobank Global Sector Strategist, Mary Ledman addressed the topic in a recent report entitled “The Dairy Dominoes, How China’s Increased Self Sufficiency is Reshaping Global Trade.”

Speaking in the August 5 “Dairy Radio Now” broadcast, Ledman said it’s been a work in progress since 2018 when China released its five-year agricultural plan, which she likened to a U.S. farm bill.

They established a goal of increasing milk output by nearly 11 million metric tons, she said, or about 25 billion pounds, equivalent to Idaho, Washington State, and maybe even Oregon. “And they did it ahead of schedule,” she said.

They added a million head to their herd, and they were high-producing dairy cows on farms of 5,000-10,000 cows, comparable to U.S. herds of that size. She reported that China imported about a million head of replacement heifers from New Zealand and Australia, in the time period of 2018-2023.

“To continue on this path,” Ledman said, “They need to increase their animal husbandry of replacement heifers, but that’s yet to be determined. There are feed constraints, water constraints and land constraints,” Ledman said. However, “The last five years shows us that, with China, where there’s a will, there is a way.” 

Can other countries make up for China’s smaller purchases? Ledman answered, “Yes. We have a growing world population and while China’s absence is large, as they are the world’s largest dairy importer, it has particularly impacted whole milk and skim milk powder. The whey market is still very important to the United States and China has not developed its domestic cheese industry that would produce that whey. The powder deficits are being absorbed by Algeria, Southeast Asia, Mexico, and others,” she said.

Speaking of trade; Tuesday’s Global Dairy Trade Pulse again saw just under 3.86 million pounds of product sold, the same as the week before, and the price of skim milk powder was slightly lower while whole milk powder was up slightly. About 2.8 million pounds of regular whole milk powder was sold, along with 1.1 million pounds of skim milk powder.