Dairy Market: Benchmark price jumps $3.50

The July Federal order Class III benchmark milk price was announced at $24.54 per hundredweight, up $3.50 from June, 6 cents shy of the all-time record $24.60 in September 2014, and $6.99 above July 2019. It put the 2020 average at $17.30, up from $15.58 a year ago and $14.37 in 2018

Monday’s Class III futures portended an August price at $19.43; September, $16.24; October, $16.54; November, $16.51; and December at $16.22.

The July Class IV price is $13.76, up 86 cents from June but $3.14 below a year ago, and the lowest July Class IV price since 2015. Its average now sits at $13.78, down from $16.11 a year ago and compares to $13.73 in 2018.

While the milk price news is good, there’s been a lot of disappointment on U.S. dairy farms. The Daily Dairy Report’s Sarina Sharp explained in the Aug. 10 "Dairy Radio Now" broadcast that farmers whose milk check carried a high Class IV component found them to be “the smallest in more than a decade.”

Sharp blamed the disconnect between Class III and Class IV milk prices as the major culprit. “The Class III was at $21.04 in June, while the Class IV was at $12.90, so in a lot of regions you’re already splitting roughly half your milk check between those two classes.”

Certain aspects of milk pricing formulas also came into play, she said. When there’s a big disconnect between Class III and IV, the Class I price is based on the average of those prices, plus a 74 cent premium so, instead of Class I being the highest class, it falls somewhere in the middle of the Class III and IV.

When Class I milk is priced considerably above manufacturing grade milk, processors can pull their milk out of the revenue sharing pool of their Federal order and that happened in a lot of regions, she said, most notably California, which recently joined the federal order system.

Timing between the prices is another quirk of U.S. milk pricing and bottom line. Instead of a $20 milk check, many received less than $12, Sharp concluded.

The University of Wisconsin’s Mark Stephenson and Cornell’s Andrew Novakovic, warned of the situation in early July and gave a detailed explanation in a paper entitled “Making Sense of Your Milk Price in the Pandemic Economy: Negative PPDs, Depooling and Reblending.”

Plunge continues

Dairy product prices entered August in a shambles compared to a month ago. The Cheddar blocks fell below $2 per pound last Tuesday and closed Friday at $1.7050, down a whopping 54.75 cents on the week and 16.25 cents below a year ago.

The barrels finished at $1.5175, down a record 71.75 cents on the week and 20.25 cents below a year ago; 31 cars of block traded hands last week at the CME and 25 of barrel. Class III futures dropped as well.

The blocks surrendered another 7.5 cents Monday and gave up a nickel on Tuesday, dipping to $1.58, the lowest since May 13, and $1.42 below its $3 peak on July 13.

The barrels were down 3.75 cents Monday and lost 3.50 cents Tuesday, rolling to $1.4450, 13.5 cents below the blocks.

StoneX stated in Monday’s "Early Morning Update" that “we overshot the mark to the upside; expect we overshoot to the downside and then find equilibrium somewhere in between.” The declines in prices set some records but, as StoneX put it, “All we have done over the last few weeks is get cheese prices down to ‘normal’ values.”

That is certainly true. However, current reality, or its perception, leaves room for much volatility. HighGround Dairy reported in its Aug. 3 "Monday Morning Huddle" that “a new forecast projects that one in three U.S. restaurants may close permanently this year, showing how the pandemic is decimating an industry that employs millions.”

It adds that the U.S. economy shrank 33% in second quarter, the “steepest decline since the government started keeping records in 1947,” and “this was followed by the fact that tens of millions of unemployed Americans lost $600 in additional weekly jobless benefits after the White House and Congress failed to reach an agreement to extend the supplement.”

President Trump has since intervened by executive order but the result remains to be seen.

Another “reality” is that demand for Class I milk is questionable as many schools will not fully open across the nation and HGD warns that will make more milk available for cheesemakers even as U.S. milk output is steady-to-higher in the Midwest, Idaho and California.

Butter plunged to $1.4250 per pound last Tuesday as 50 carloads found their way to Chicago in the first two days of trading. It rallied Wednesday and Thursday, only to slip back some Friday and close at $1.53, down 7.75 cents on the week and 78.5 cents below a year ago. A total of 63 cars exchanged hands last week.

Monday’s butter lost 5.25 cents but regained 4.5 cents Tuesday, clawing its way back to $1.5225.

Spot Grade A nonfat dry milk saw its Friday close at 95.50 cents per pound, 2.25 cents lower on the week and 7.25 cents below a year ago, with 16 sales reported.

The powder was down 1.25 cents Monday and inched down another quarter-cent Tuesday to 94 cents per pound.

Dry whey closed Friday at 32 cents per pound, down 2.25 cents on the week and 3.5 cents below a year ago on 11 sales.

The whey inched a half-cent lower both Monday and Tuesday, slipping to 31 cents per pound.

Lots of cheese

The Agriculture Department’s June Dairy Products report shows cheese output climbed to 1.1 billion pounds, up 0.3% from May but an eye-catching 3.5% above May 2019. The year to date total hit 6.5 billion pounds, up 0.5% from a year ago.

Wisconsin produced 281.5 million pounds of the total, up 0.8% from May and 1.0% above a year ago. California output, at 203.6 million pounds, was down 2.9% from May and unchanged from a year ago. Idaho vats added 87.3 million pounds worth, up 8.2% from May and 1.4% above a year ago.

Italian type cheese totaled 475.3 million pounds, down 1.1% from May but 3.0% above a year ago. YTD output is at 2.8 billion pounds, down 0.6%.

American type cheese totaled 438.2 million pounds, down 0.9% from May but 2.5% above a year ago. YTD American was at 2.6 billion pounds, up 1.5%.

Mozzarella output climbed to a pizza-generated 384.8 million pounds, up 3.9% from a year ago, with YTD at 2.2 billion pounds, up 0.1%.

Cheddar, the cheese traded at the CME, fell to 310.6 million pounds, down 7.1 million pounds or 2.2% from May but 3.2 million or 1.0% above June 2019. Year to date Cheddar stood at 1.9 billion pounds, up 1.2% from this time a year ago.

Butter production dropped to 150.0 million pounds, down 28 million pounds or 15.7% from May and 4.8 million pounds or 3.1% below a year ago, ending 10 consecutive months that it topped year ago levels. YTD butter output was at 1.12 billion pounds, up 7.0% from 2019.

Dry whey totaled 85.4 million pounds, down 1.3% from May but 2.9% above a year ago, with YTD at 492.6 million pounds, up 4.1%.

Dry whey stocks totaled 85.4 million pounds, down 0.4% from May but 23.6% above a year ago.

Nonfat dry milk output totaled 146.7 million pounds, down 11.9 million pounds or 7.5% from May and 11.2 million or 7.1% below a year ago. YTD powder sits at 1.0 billion pounds, up 1.6% from 2019.

Stocks fell to 289.1 million pounds, down 56.6 million or 16.4% from May and were down 2.1 million or 0.7% below 2019.

Skim milk powder output jumped to 61.3 million pounds, up 14.2 million pounds or 30.1% from May and 9.2 million pounds or 17.7% above a year ago. YTD skim milk powder hit 268.1 million pounds, up 10.2% from a year ago.