The cash cheese market answered a question Monday regarding the huge price spread between block and barrel cheese, according to Dr. Brian Gould, Associate Professor at the University of Wisconsin. Everyone was wondering if the blocks would come down or would the barrel come up, as it’s been a concern for the number of trading days it was so large. The blocks fell 4 3/4-cents, to $1.52 per pound, and the barrels lost three quarters, and slipped to $1.4325.

Speaking in Tuesday’s DairyLine, Gould pointed to the latest American cheese stock numbers, which increased in November for the first time in five years, and said Monday’s downward price movement was not a surprise.

He suggested that listeners log on to the University’s website, “Understanding Dairy Markets,” at http://future.aae.wisc.edu/, where the values of Cheddar cheese are imputed, based on the current daily Class III, butter, and dry whey futures prices. Friday’s imputed value was $1.58 per pound, according to Gould, so Monday’s drop to $1.52, may trigger declines this week in the Class III milk.

When asked if cheese demand is down or pizza sales lagging; Gould admitted that he did not have current commercial disappearance numbers, due to the lag in reporting, but production data from January through November of this year showed Cheddar output was up 2.4 percent from a year ago. He said that’s a very large number relative to what he believes we’ll see in commercial disappearance down the road, considering what’s going on with our economy.

“It’s a real supply issue,” he concluded. “Our production was up in almost every month this year, relative to last year, and we know our commercial disappearance is under duress.”

The cash dairy markets continue to show a steady increase. Dairy economist Brian Gould, Associate Professor at the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison sees that continuing, especially in light of what is going on internationally.

The production in New Zealand and Australia is not going to be as high as initially forecast. “Since July, we’ve had a steady increase in the international prices of whey, skim milk powder, cheddar and butter,” he said. “And they are increasing not only in dollar terms but also relative to the U.S. prices.”

Gould says the outlook is great for the continued increase in demand for U.S. dairy products. “Given the increase in importance of export markets, I think it bodes well for the continuation of higher cheese prices in spite of having pretty high cheese stocks,” he said.

In terms of relative values, the ratio in New Zealand , dry whey is about 40 percent above the U.S. domestic price. Nonfat dry milk –skim milk powder is 30-35 percent over and butter is about 20 percent higher, “Making our export markets very attractive relative to what they were just six, seven months ago,” Gould concluded.

The first day trading in the last week of October was quiet, with all prices remaining unchanged. The University of Wisconsin’s Dr. Brian Gould, said in Tuesday’s DairyLine that people are trying to catch their breath from the dramatic changes of last week so he doesn’t see Monday’s trading as a good indicator of what’s going to happen the rest of the week.

He believes the market will closely watch what’s happening in the European Union because of the elimination of export subsidies on skim milk powder, which used to be about 13 cents per pound. The Whole milk powder subsidy was halved, according to Gould, and is now just 10 cents per pound, and the butter subsidy was reduced from 44 cents to 26 cents, a drop of 18 cents.

That’s good news for U.S. producers, he said, as it makes U.S. dairy products more competitive, not only with the reduced export subsidies, but the U.S. dollar is falling in value relative to EU and New Zealand dollars and most major currencies, “so our exports are getting cheaper,” he said.

That could mean a reduction in the use of the Dairy Export Incentive Program by the U.S., according to Gould, which has been very active from July onward and significant tonnage was subsidized and exported.

A year ago, U.S. dairy exports were on fire and that situation could return. Gould pointed out that in June and July there was significant improvement in U.S. dairy exports and, in second quarter 2009, the U.S. was a net dairy exporter although that slowed in August for some commodities. Skim milk powder and lactose exports remained strong, he concluded, but “Things are looking up in terms of exports and that’s good news for U.S. dairy producers.”

The Agriculture Department issues its monthly Ag Prices report Friday morning. That will include the latest milk feed ratio and October Federal order milk prices are announced Friday morning. California prices are out the following Monday. Check here for complete details.

The last day of trading in August saw cash butter hold at $1.17 per pound but cheese dropped for the third session in a row. Blocks and barrels lost a penny and a half, slipping to $1.3525 and $1.3250 respectively, but the University of Wisconsin’s Dr. Brian Gould said in Tuesday’s broadcast that he wasn’t surprised by the drop in cheese prices.

He echoed some of his colleague’s remarks from last week, Dr. Robert Cropp, and pointed out that we have not seen the reductions in milk production that were expected by now. Combine that with near record stock levels of total cheese and near record production of cheese in the last two months and Gould said, “I’m not surprised that $1.40 cheese price has been dropped.”

What is confounding is that cheese demand appears to be good right now. Commercial disappearance is a “squishy number,” Gould said. Second quarter 2009 cheese demand was strong, he said, but “That was countered by what was going on in butter and powder and, when combined with cheese disappearance versus butter and powder, the disappearance of all milk is up just 0.3 percent. That just about equals milk production in that same period, he said, “So, not an increase in demand, relative to the supply of milk products.”

Gould also reported some data that USDA issued Friday which indicated that total cheese consumption in 2008 was down from 2007 and 2006. 2008 consumption per person was 32.48 pounds per person, according to USDA, down from 33.19 pounds in 2007 and 32.70 pounds in 2006.

A major drop was on Mozzarella and process cheese, he said. He’s not sure what has happened in 2009 but the thinking is that, with lower incomes, people are trending away from expensive eating establishments to lower cost restaurants, which would include pizzerias, so that Mozzarella number may be up in 2009, versus 2008.

Cheese prices remain at or below support and the University of Wisconsin’s, Dr. Brian Gould, said in Tuesday’s DairyLine that it’s a continuation of a trend and he said the market had already taken into account the final numbers of the latest CWT herd removal.

Gould reported that 101,000 cows representing almost 2 billion pounds of milk were removed. About 40 percent of that milk is from the West and about 7 1/2 percent from the Midwest, though 34 percent of the farms are from the Midwest.

Looking at the size distribution, Gould said the average farm size whose bid was accepted this time was 65 cows in the Midwest, compared to the Southwest average of 684 cows. That, he said, may reflect some of the objectives of the CWT program to assist those who want to get out of the dairy business.

Reacting to National Milk saying that additional removals will be conducted, Gould said the thinking is that another 100,000 cows needs to be culled in order to make any dent in milk output but the 200,000 cow estimates were made months ago and things have since worsened.

The futures markets for the rest of 2009 and 2010 have lost more ground, according to Gould, and he’s not sure that even 200,000 less cows will be enough turn things around.

Cash cheese prices started the 4^th of July week mixed. The blocks lost a half-cent while the barrels gained a half, but both remain below the government support price. That doesn’t bode well for Class III milk prices but the University of Wisconsin’s, Dr. Brian Gould, said in Tuesday’s DairyLine broadcast that there is at least one positive trend in dairy commodities, specifically dairy protein.

Dry whey prices, as reported weekly by the National Agricultural statistics Service (NASS), have seen a steady rebound since the middle of February, he said, climbing from a February 7 low of 15 cents per pound, to a June 20 high for the year of 27 cents, an 80 percent increase. He added that the 27 cent price level compares very favorably to the international price which is about 28 cents per pound, FOB Europe.

Furthermore, dry whey exports, in contrast to other dairy commodities, saw their second best quarter ever in pounds removed in first quarter 2009, so “It’s been a very very positive part of the dairy side.”

Concurrent with that and, one of the reasons for those higher prices, is that manufacturer stocks of dry whey are significantly below a year ago, according to Gould. Looking at April, for example, dry whey stocks amounted to 48.8 million pounds, he said, down 15 percent from April 2008 and, since December 2008, we had a steady decline in end of month stocks, to the tune of 25 percent since December.

“I know cheese prices aren’t the best,” he concluded, “But the whey is starting to recover and the futures market looks very positive for whey and that helps the Class III price.”

The cash dairy markets showed little reaction to what could have been perceived as a bullish production report. The University of Wisconsin’s Dr. Brian Gould said in Tuesday’s DairyLine that the market was neutral in its response because the report was what the market had expected, yet he thought it surprising, being as this was the first down turn in production since June 2004.

He said the drop was a result of per cow output being down and a drop in cow numbers but he believes revisions will show an even larger drop in cow numbers.

He also pointed to the regional variation in milk output from the impact of current low milk prices. He cited California’s, Idaho’s, and New York’s drop and Wisconsin and Minnesota’s increase. Texas and New Mexico also registered increases, he said, and it’s “interesting as to who is being impacted by current prices. The Upper Midwest seems to be weathering this storm quite nicely.”

But Gould warned that last week’s Dairy Market News shows that the heavy culling that we have seen result from the CWT herd removals and the higher feed costs appears to be leveling out and the decline in milk output may not hold.