Benchmark jumps $3.50
The July Federal order Class III benchmark milk price was announced Aug. 5 at $24.54 per hundredweight, up a hefty $3.50 from June, 6 cents shy of the all-time record $24.60 in September 2014, and is $6.99 above July 2019.
It pulled the 2020 average to $17.30, up from $15.58 a year ago and $14.37 in 2018
On Aug. 7, Class III futures settlements say that is the top. August settled at $19.36; September, $16.23; October, $16.52; November, $16.45 and December, $16.17.
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 to it, found them to be “the smallest in more than a decade.”
Long story-short, 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 Class IV.
And, 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.
Class III milk utilization was 0.7% in June, Sharp reported, and most of the Class III milk was pulled out of the pool so it was not counted in the blend for the dairy farm mailbox milk price.
The timing between Class I milk and Class III and IV prices is also a factor. The National Dairy Products Sales Report prices have a two week lag from the spot prices, Sharp said, and Class I prices are announced a month ahead of the Class III and Class IV.
There is a six week lag between when we are pricing Class I milk and when we price Class III and IV milk, Sharp said, so the Class I price was sharply lower than Class III in June, which further expanded that Producer Price Differential (PPD), which was negative for most dairy producers.
Instead of a $20 check, many received less than $12, Sharp concluded. “Only those in regions with almost entirely Class III received anywhere close to $20.”
I wrote about this in early July, citing warnings from the University of Wisconsin’s Mark Stephenson and Cornel’s Andrew Novakovic, who gave a detailed explanation in a paper entitled “Making Sense of Your Milk Price in the Pandemic Economy: Negative PPDs, Depooling, and Reblending.” You can find it at https://dairymarkets.org/PubPod/Pubs/IL20-03.pdf.
Meanwhile, U.S. dairy product prices entered August in shambles compared to a month ago. The Cheddar block cheese fell below $2 per pound on Aug. 4 and closed Aug. 7 at $1.7050, 54.75 cents lower on the week, lowest since May 13, $1.2950 below its record $3 peak on July 13, and 16.25 cents below a year ago.
The barrels finished at $1.5175, down 71.75 cents on the week, 20.25 cents below a year ago, and 18.75 cents below the blocks.
Chicago-based dairy brokerage HighGround Dairy (HGD) 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, “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.”
“A key wildcard over the next several months,” says HGD, is how the government plans to continue supporting the dairy industry. This injection of massive amounts of stimulus to purchase dairy products has contributed to intense volatility in recent weeks and a primary reason why block cheese prices hit a record high last month. USDA has indicated they will spend the remaining $500-$700 million in the ‘Farmers to Families Food Box’ program in Round 3 after the current round expires on Aug. 31.”
Butter plunged to $1.4250 per pound Aug. 4, as 50 carloads found their way to Chicago the first two days. It rallied Aug. 5 and 6, only to slip back some Aug. 7 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 on the week.
Spot Grade A nonfat dry milk saw its Aug. 7 close at 95.50 cents per pound, 2.25 cents lower on the week and 7.25 cents below a year ago. Dry whey closed at 32 cents per pound, down 2.25 cents and 3.5 cents below a year ago on 11 sales.
On a brighter note; a sharply higher All Milk price pulled the June milk feed price ratio into positive territory for the first time in seven months and the highest level so far this year. The USDA’s latest Ag Prices report put the ratio at 2.36, up from 1.77 in May, and compares to 2.08 in June 2019.
The index is based on the current milk price in relationship to feed prices for a dairy ration consisting of 51% corn, 8% soybeans and 41% alfalfa hay. One pound of milk could purchase 2.36 pounds of dairy feed of that blend in June.
The U.S. All-Milk price averaged $18.10 per hundredweight (cwt.), up $4.50 from May and was dead even with June 2019.
The national average corn price slipped to $3.16 per bushel, down 4 cents per bushel from May and 82 cents below June 2019. Soybeans averaged $8.34 per bushel, up 6 cents from May and 3 cents above a year ago. Alfalfa hay averaged $179 per ton, unchanged from May but $14 per ton below a year ago.
Looking at the cow side of the ledger; the June cull price for beef and dairy combined averaged $71 per cwt., up $2.70 from May, $5.10 above June 2019, but was 60 cents below the 2011 base average of $71.60 per cwt.
Milk cow replacements averaged $1,310 per head in July, up $60 per head from April and $80 above July 2019. They averaged $1,350 per head in California, up $50 from April and $50 above a year ago. Wisconsin cows averaged $130 per head, up $100 from April and $50 per head above July 2019.
There was good news for U.S. dairy in the USDA’s latest export data, despite the high prices at that time.
June cheese exports totaled a record 84.7 million pounds, up 29% from June 2019. HGD credited manufacturers pushing to make sales into the global market due to the outlook for domestic consumption turning negative because of the stay-at-home orders, shuttered schools, and restaurant closures.
Butter exports were up 51.9%, nonfat and skim milk powder was up 77.3%, and dry whey was up 42.4%. A weakening U.S. dollar has helped U.S. competitiveness. ❖