The impact of drought and fires in Russia was felt all the way back to U.S. dairy farms this week on news that Russia will ban all exports of wheat through the end of the year, sending grain prices higher.  

Now that the “smoke has cleared,” sort of speak. Dairy Profit Weekly editor Dave Natzke reported Friday that the news sent wheat futures to spike earlier in the week and pulled other grain prices higher, creating fears of skyrocketing feed prices for U.S. dairy and livestock farmers. Thankfully, grain prices moderated somewhat later in the week, Natzke said. 

Helping relieve some of the concern, USDA’s crop production report, released on Thursday, estimated both 2010 U.S. corn and soybean crops to be the largest on record. The corn crop is forecast at a record high 13.4 billion bushels, with yields expected to average a record high 165.0 bushels per acre, and soybean production was forecast at a record high 3.43 billion bushels, with yields expected to equal last year’s record of 44.0 bushels per acre.  

With the record U.S. crops, USDA projects larger supplies of feed grains, Natzke reported, although strong export demand will eat up much of that supply. 

Heavy global demand caused USDA to raise its season-average price forecasts slightly. Farm-level corn prices are now expected in a range of $3.50-$4.10 per bushel, up a nickel on each end; and soybean price projections were raised 40 cents on each end, to a range of $8.50-$10.00 per bushel.

USDA’s weekly crop/weather report says U.S. corn and soybean crops are advancing well ahead of schedule. And, despite widespread heavy rains, more than two-thirds of both corn and soybean crops are rated; good to excellent.

USDA adds that abundant moisture is helping produce record or near-record high yields of alfalfa and other hay, as well.

 Corn and soy complex futures were higher after USDA’s Thursday reports, despite the higher-than-expected corn and soybean production estimates. Strong domestic and global use was cited, Natzke concluded

USDA’s announcement of a temporary increase in the price support program may increase farmers milk checks in the near future, but also raises several questions. The increase of 18-cents on cheese and 12-cents on powder was announced Friday.“It’s not going to provide the immediate price relief that USDA promises, just because of the way the lags are in the pricing system,” Alan Levitt, editor of the CME’s Daily Dairy Report said.  The August Class I price is already set but we’ll see some impact on the August Class III and IV prices.  He estimates the All Milk price may add 50 cents to farmer’s milk checks bringing some relief by September.

USDA expects to buy 75 million pounds of cheese, but the spot price has already increased to just under that support level, “So I don’t think we’re really going to see any sales of cheese to the government,” he said.

As for powder, USDA said they expect to buy 150 million pounds in just three months. “That would be huge,” Levitt said. “That’s probably half the powder we would produce in that time period.”

But, he added increasing the support price just makes our exports even less competitive than they were before. “It’s going to be interesting to see whether USDA is going to give bigger DEIP bonuses or if they’re just going to buy a bunch more powder and put it away and then we’re going to have to figure out how to get rid of that powder later.”

We should start to get a sense of that this week. If we see any DEIP bonuses that will give us a little bit of indication. “My guess is the bonuses are not going to increase enough and that’s kind of unfortunate because sales to CCC had almost stopped, and now they’ll probably have to pick up again,” he said.

Levitt said the timing isn’t very good because our weak dollar has given us a little bit of advantage against Europe and Oceana, which is in its off season. “We really had a chance to move a little powder over the next few months, but now we don’t know if that’s going to happen.”

He said the bottom line is it throws more uncertainty into the dairy markets when there was already a lot of uncertainty. Some will be second guessing USDA’s decision and many questions remain.

“Is the support price increase going to be extended after October? What signals is it going to send to the farm? Is it going to make farmers hang on longer? What’s going to happen to all that powder in storage?” he asked.

“I recognize that it’s going to improve milk prices in the short term, but in the long term, at some point we have to get rid of these stocks and I don’t know if this move is going to help us do that,” Levitt concluded.

There’s still no spark in the cash dairy markets from Friday’s announcement of another CWT herd removal, though cheese prices were unchanged in Monday’s trading and butter inched a quarter-cent higher.

“People just need to see the milk supply contract,” said Alan Levitt, editor of the CME’s Daily Dairy Report in Tuesday’s DairyLine broadcast. “We’re not there yet,” he said, “We’re a few months away.” The last CWT removal took out a little over 100,000 cows or about 1.1 percent of the milk supply but we still need to take out more, according to Levitt.

Considering the below support cheese prices, whey has become an increasingly important factor in the Class III milk price and Levitt pointed out that whey always has been an important factor.

He reflected on the big run up a couple years ago when whey doubled and tripled in price and tacked a few dollars onto the Class III price but he warned that we won’t be doing that this time.

Whey has gained about 13 cents since early February, according to Levitt, and every penny on whey equates to about 6 cents on the Federal order Class III price. That’s not the case in California any more but whey has added close to 80 cents to the Class III price, he said, and “hopefully it will hold up here,” but he cautioned that whey has leveled off as it approaches 30 cents per pound.

Levitt predicts the Federal order Class I base milk price, which is announced Friday morning by USDA, will drop to $10.03 per hundredweight. That would be a loss of 23 cents from July and would be $8.44 below August 2008. It would also generate an MILC payment to producers of $1.65 plus a feed adjustor of about 10-15 cents, though feed prices have come down.

Market analyst Alan Levitt, editor of the CME’s Daily Dairy Report, said in Tuesday’s DairyLine that we’re in the middle of the spring flush and, while it’s lighter than years past, plants are still running at seasonally heavy levels. He adds that schools are starting to recess for the summer, making more milk available for manufacturing, and plants are gearing up for Memorial Day weekend which always means extra milk to deal with.

He also pointed to the surprising jump in the milk volume that moved to the cheese vat in March. Total cheese output was up 4.3 percent from a year ago, he said, and Cheddar was up 3.1 percent, so a lot of cheese is still overhanging the market and he therefore believes prices will linger near support for awhile.
Some think cheese will start moving to the government under the price support program but Levitt doubts prices will be down long enough for that to happen. Manufacturers can’t just take cheese they have in storage and sell it to the government, he said. It has to be made to USDA specifications and he’s not aware of anyone geared up to do that and they have to be sure the price is going to stay low enough long enough to make that worthwhile and he doubts that is the case.

The bright spot in the market is butter which inched up another quarter-cent Monday, to $1.2425 per pound. When asked if this is being driven by ice cream demand, Levitt answered, that seasonally, there is less cream available to the butter churn but he believes people are “looking at that price and think it’s a pretty good deal to buy butter and stock up. There’s concern that later in the year, as milk supplies start to contract, butter would be one of the first things to go, he concluded, “So maybe there’s concern that they need to be stocking up on butter now as it’s a pretty good value.”

Cash cheese prices continued to inch higher Monday, with blocks gaining a half-cent Monday and barrels up three quarters to $1.2550 and $1.3250 per pound respectively but the spread widened to 7 cents. Alan Levitt, editor of the CME’s Daily Dairy Report, called it “an encouraging broad based rally in the first half of March” but he warned that “We’re not completely out of the woods yet. We have a long way to go before we can really say that the bear is in hibernation.”

The barrel price is leading the way, he said, and has gained more than 14 cents since the end of February, and is at the highest price since before Christmas, but blocks are moving up more slowly.

He reminded us that a month ago the cheese price made a run above $1.30 but orders slowed and buyers moved off to the sidelines and prices fell so he warned that before we get too excited about this rally we have to see demand sustained beyond the $1.30 mark. Buying has to continue at the level, he said.

The market is anticipating Wednesday’s February milk production data. Levitt predicts we’ll see a continued slowdown in production but still expects output will be up about 0.6 percent in the 50 states, adjusting for Leap Day. It’s very slow growth, he said, but he still sees output remaining a bit above a year ago.

The April Federal order Class I base milk price is announced Friday morning by USDA. Levitt predicts it will jump to$10.45 per hundredweight. That would be a gain of $1.02 from March but would be $8.16 below a year ago. He expects the Class III advanced pricing factor to be the “higher of” and looks for an MILC payment of $1.46 per hundredweight, not counting the feed cost adjuster. More Dairy News Here

Listen to the complete Tuesday DairyLine broadcast here:

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