CME dairy futures for butter and cheese improve, boosting forecast for 2018 all-milk prices

National Milk Producers Federation

While the U.S. average all-milk price lost a total of $2.80/cwt. in three roughly equal drops from November 2017 through this past February, milk solids, cheese and butter prices are rising according to the Dairy Market Report for the month of April released by the National Milk Producers Federation.

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Here are some of the report's highlights.

Commercial use

Total fluid milk sales declined more than 2 percent from a year ago during the December 2017–February 2018 period, which is about the same as the average decline during the prior six months.

Total estimated milkfat use in all fluid milk products eked out a small gain during the same period. Commercial use of both American and other types of cheese showed strong increases during the period, and total milk use showed positive gains when measured on both a milkfat and a skim solids basis.

U.S. dairy trade

The rate of annual increase in U.S. cheese exports has been moderating in recent months, after staying well into two-digit percentages for most of 2017. From the three-month period of July-September, 2016, which marked the start of the recent growth period, through December 2017–February 2018, U.S. cheese exports grew by almost 24 percent.

Meanwhile, dry skim ingredients have recently taken over as the key driver of continued export growth, after generally dropping during several months in the middle of 2017.

Total U.S. dairy exports increased from 14.1 to 15.8 percent of U.S. milk solids production over the year between the two most recent December–February periods. U.S. imports continued to fall below year-ago levels by double-digit percentages for the major import categories of butter, cheese, milk protein concentrate and casein during December 2017–February 2018.

Imports as a percentage of U.S. milk solids production during the period reached their lowest level in three and a half years.

Milk production

U.S. milk production rose in February by 1.8 percent from the same month in 2017, the same rate of annual increase as in January. This further confirmed that the nation’s milk production is springing back from a period of unusually constrained growth of just barely above 1 percent during the last third of 2017.

Milk production was up by 1.6 percent from a year earlier during the three months of December 2017–February 2018.

Total milk solids production rose by 2 percent from a year ago during the same three months. Total dairy product production in the United States is more closely correlated with milk solids production than with the fluid volume of raw milk. Fueling the February increase in milk volume were gains in California, Idaho and Washington.

Dairy products

Annual growth of domestic natural cheese production hit new highs from December 2017–February 2018 for all five categories tracked below. For both American-types and
Cheddar in particular, it was the largest three-month period increase in eight months.

For Italian-types and mozzarella specifically, it was the largest in 15-16 months. For total
cheese, it was more than three years earlier that last witnessed this level of production growth. It is interesting to note that production of skim milk powder, generally an export-focused product, was below year-ago levels during this period, even though exports of dried skim milk powders of all types grew by 20 percent at the same time.

Dairy product Inventories

Stocks of all four reported products rose from January to February. Based on measurement in terms of days commercial use on hand, the February levels were particularly excessive for butter and nonfat dry milk, but somewhat less so for both
American and other cheese.

Dairy product, federal order class prices

Butter prices reported by the U.S. Department of Agriculture’s Agriculture Marketing Service (AMS) broke a six-month losing streak in March by posting the first gain over the prior month since August of last year.

But the two dry skim ingredient prices also reported by AMS continued an even longer decline, with nonfat dry milk dropping almost continuously by more than $0.20 a pound since last June and dry whey prices down steadily by more than half since last April.

The March upturn in butter and Cheddar cheese allowed both Class III and Class IV prices to end their own rather steady slides over the past several months with gains in March.

Milk and feed prices

The all-milk price fell by $0.80/cwt. from January to February, to $15.30/cwt. This was $2.80/cwt. below its most recent peak just three months earlier in November 2017. The monthly margin under the MPP for February 2018 was $6.88/cwt., $1.23/cwt. less than the margin a month earlier.

This was the third-straight monthly drop in the MPP margin of more than $1.00/cwt. The two previous ones, from November to January, were driven mostly by lower milk prices.

The further drop from January to February was split a bit more evenly between a lower all-milk price and an increase in the formula-determined feed cost. Most of the feed cost increase for February, on a per-hundredweight-of-milk basis, was due to higher soybean
meal prices. All three components of the MPP feed cost formula were higher in February than in January.

Bureau of Labor Statistics data shows the average retail price of whole milk in the United States declined slightly from January to February, following a drop of almost $0.20 a gallon a month earlier. By contrast, the U.S. average retail price of Cheddar
cheese rose modestly in February, to its highest level since November 2016.

Looking ahead

In its monthly forecast update for April, USDA did not change its forecast for total milk production during 2018 from its March report. It also left unchanged the midpoint of its forecast for 2018 average cheese prices and dropped its midpoint 2018 price forecasts for butter, nonfat dry milk and dry whey. Accordingly, the department lowered its midpoint forecast for the 2018 average all-milk price by $0.20/cwt. to $15.85/cwt.

Over the same month, however, the CME dairy futures for butter and cheese improved,
increasing the futures-based forecast for the 2018 all-milk prices by about $0.50/cwt. to $16.55/cwt.

USDA’s online MPP Decision Tool has been converted to project monthly margins, reflecting the improvements made by Congress to the MPP earlier this year. At the time the department’s April dairy forecast was released, the tool was projecting that the MPP margins would be below $8.00/cwt. from February through August this year, and would average $7.63/cwt. for all of 2018. Producers have until June 1 to sign up for coverage under the MPP for calendar year 2018.

The Dairy Market Report is written and produced by the National Milk Producers Federation and sponsored by Dairy Management Inc. in Rosemont, IL.