Weekly Update

Alliance of Western Milk Producers

December 31, 2008          volume 49, 2008  

Cheese:  Collapse to support

Cheese (comment continued)

For all intents and purposes Cheese has dropped to support this week.  Support for Block cheese is $1.13 and for Barrel it is $1.10.  Blocks dropped 13.75 cents this week and a total of 49.5 cents in the past 4 weeks.  Only 8 loads of block were sold this week and there was only one uncovered offer at the end of each day.  Even worse, prices had already dropped 65.8 cents in the previous 28 weeks when the May 19, 2008 price was at a record $2.285.  That is a nearly unbelievable decrease of $1.153 per pound or roughly a decrease in the Class 4b cwt price of $11.50.  Using this week’s prices in the 4b formula generates a price of $9.44 per cwt.  If prices stay this low for all of January the California overbase price will be less than $10.00 per cwt.  The fall was so rapid that it is likely that only a few plants have themselves set up to produce and package cheese for CCC and we could well see (for just a month or so) average sales prices at less than support. The graph on page 1 gives a visual of the magnitude of the drop.  This is extremely ugly news!  

Butter loses a penny in lackluster trading.

Only the relatively good news of inventories being below last year’s level kept this market “sort of” steady.  The real news in the DMN comment section is that “the trade is talking about potential butter offerings to the price support program”.  Support for Butter is $1.05.  Today’s market is only 8 cents above that.  It seems like the price will have to drop soon.  

Nonfat Dry Milk –

Sales to CCC continue and CWAP this week is only a penny above support price.  Even at this week’s reduced NDM price the 4a formula generates a price of $9.54 per cwt – 10 cents per cwt higher than 4b.  Who could have imagined that!  

Whey Products:  WPC 34 up another 2.5 cents!

With NDM hovering at the 80 cent support price (and not likely to move lower) WPC 34 at 47 cents is still a pretty good deal.  This adjustment could run for a while but will in time find the comfortable value compared to NDM.  Dry Whey prices are unchanged in light trading with a weak market undertone.   

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Revaluing America

Beginning about October 2007 this country launched itself on very energetic speculative effort that ran the values of nearly all things to record highs (some believed values would go up forever and not only said so but invested using that as the base theory).  This “surge” of investment was aided by cheap and readily available credit and generated an unbroken upward push for 9 months – until July 2008.  For those nine months America revalued upward.  Then in July someone, somewhere noticed that this could not keep going.  I like to think the major contributing factor was the shift of popular opinion that a) drilling off-shore in America was a not such a bad idea after all and b) that expansion of nuclear power would be a good idea that was supported by 74% of Americans. No matter the cause, it happened. In the next six months – July until now – the prices broke downward strongly.  Generally it seems energy commodities are still on a downward track and are still looking for a bottom.  The other commodities seem to have found a bottom in Dec and have started climbing.  Corn for example is now at $4.12 per bushel.  Prices were below $3.00 in Dec but did not stay there long. 

The chart above shows the magnitude of the drop off in prices.  These are all stunningly large and quick slides downward.  My point is that the charts show an amazing similar pattern with the highs in every product being reached in July 2008 – they all fell together.  In very quick order the speculative excesses have be driven out of the market and except for the energy field it seems most products have found the level where fundamental economics will again guide market movement.  Both corn and soybean meal have hit lows in Dec and now have moved strongly upward again, but no one expects the corn price to reach $7.00 again but the potential exists to get to $5.00 which is historically a very high price indeed.   

Early 2009 likely to be like early 2006 – and that is not good

The first six months of 2006 were a financial disaster for producers and conditions now replicate that situation with one overwhelming difference.  Because of the ethanol policy of this country the price of corn (and thus other feeds) are double what they were in 2006.   

Our industry was extremely lucky to have the world wide shortage of dairy product occur at the same time our feed costs were forced upward by the ethanol policy.  The resulting high milk prices made it possible absorb the higher feed costs and still turn a profit.  The final residual bit of strong market prices driven by world demand was squeezed out of the markets this week.  Prices are now at support – like they were in early 2006.  Grain prices are much higher and Class 1, 2 and 3 prices have been reduced.  2009 will be worse than 2006 was.      

The closest I can come to an inspirational statement in these conditions is one learned from a Sonoma County dairyman who said way back in the 1970’s during one of these bleak periods: “If you want to be there when it is good, you have to be there when is it bad.”  

Welcome to 2009 – Change is Upon Us.

                                                                       Until next week,     Bill Van Dam