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Dairy Products Dec 2011

mhoekema — Wed, 08 Feb 2012 23:29:10 -0800

Dairy products output matched lifted sales for the month, keeping both Cheese and Butter inventory from launching significant winter gains. Cheese pipeline is retracing to 2008 levels while butter production is pulling back.

Cheese production of 929.5 mil. pounds was up +2.4%, a lift from Nov +0.8%. YTD cheese production was up +1.61% while demand lifted +2.52% (Dec was +2.6%). Combined, this has pulled the pipeline down to 31.8 days which is between 2008 and 2009 levels. Keeping moderate stocks through Q1 will be key to keeping a floor and anticipated price recovery in 2012. Based on export levels and muted fortification, there is enough feed cost pressure to keep significant cheese production expansion within the confines of demand growth. Stocks are now significantly below year-ago levels which is the important first step to weathering the winter doldrums.
Butter production of 165.9 mil. pounds was up +5.2% from Dec 2010. This is a dramatic pullback from the 14-31% gains from Mar-Nov of 2011. The wave of butter is partially originated from a lack of fluid sales channeling cream to the churn while the skim heads to a hungry cheese vat. But components may be taking a toll as forage supplies are expensive and scarce in many regions. Two months does not a trend make but there are significant headwinds to build substantially on 2011’s butter production surge. Recovering exports have taken a big edge off this surge to which I see food service backfilling, perhaps building on in 2012 depending where US$ cross rates end up. Easter sales start soon and with that is a seasonal bump in pricing/sales. Weekly reports suggest a lift in stocks (normal for winter) so it may be a muted price recovery this spring.
Dry milk output of 186.8 mil. pounds was up 12.4% while NDM output was up 8.1% Regional production gains from earlier in the quarter combined with continued declines in fluid sales keeps a steady stream of product heading to the dryer. While year-end gains in the US$ is behind Jan-Feb price erosion, losses are poised to boost export pricing as the NZ production season winds down through the US spring. Disappearance is on a 2 month lift (+5.1-4.1% for Nov-Dec respectfully) after a fall decline on high domestic pricing. While stocks are up +14% from Dec 2010, this is only a 21 mil. pound lift and within 2 mil. pounds of Dec 2007 levels. Based on inventory, US$ weakness, and lift in sales this will move pricing higher into spring. GDT is trading from 14-21 cents over the US market from Apr-Jul as Apr traded at 1.48 and May-Jul up to 1.577. With half the dry milk output exported, price lifts will soon move into the domestic pricing. Whether this is 1 or 3 months away is anyone’s guess but unless Europe crashes, there will be a lift.

Current pricing I believe has set the low for the year, particularly for NDM and cheese pricing. Butter may be moving towards a more sluggish price cycle unless pricing sparks significant sales (as has happened many times before). The US macro economic picture is making better noises although the EU scenario keeps rearing it’s uncertain head in currency and employment markets. I’m excited about the level of cheese inventory and sales but the NDM market is weaker than expected. A good fall off in the US$ the past 30 days will stop NDM price erosion although sales will continue to be good through the quarter.

Dec Cold Storage and Milk Production

mhoekema — Fri, 27 Jan 2012 11:18:14 -0800

Cold storage out on Monday reflects seasonal trends albeit with cheese at lower-levels than a year ago and butter higher. While butter inventories will be moving seasonally higher through spring, cheese may not be seeing as great a spring surge.

Dec cheese stocks of 981.3 mil. pounds was up +1.3% from Nov but down –6.4% from Dec 2010. The 12.3 mil. pound lift was nearly half the 21.8 mil. pound lift in Dec 2010 and within historical ranges of December inventory movements. Continued low cheese pricing combined with some pullback in production will keep stocks muted into spring. Condensed skim is not moving significantly into the cheese vat as significant margin pressure on the vat with Dec inventory being sold at Jan prices keeps any stock-building a non-starter. Condensed skim is moving into the dryer where a steady export market continues to move milk overseas (53.4% of dry milk in Nov). Whey continues to be a significant profit stream for those vats with dryers as NASS pricing moved over 70 cents in Jan. ~~California cheese producers reap the most of this benefit as they are only paying out 25 cents of that price through the index despite several petitions to change.~~ Update-whey pay price is capped at 65 cents effective 9/1/11. The CDFA website was not updated with accurate information. In the era of high feed pricing, whey will remain high priced with a growing export market. Combined with whey, robust cheese sales will continue to level stocks and, on average, lift prices through spring. There is no reason to suggest that the cyclical spot cheese pricing will end until stocks contract further this summer.
Butter stocks of 105.2 mil. pounds was up 10.8% from Nov and within the range of seasonal inventories. Sales were likely robust as production should continue its high output through spring. World market pricing is about even with US so domestic pricing will be on the whims of US$ cross-rates. Exports ticked higher in Nov as overseas sales appear to be moving counter to the NZ production season. Easter is the next big sales event and I expect some price movement higher in March as exports and foodservice keep stocks within historical range but likely running 20-25 mil. pounds above 2011 stock levels. Exports will keep the edge off major price declines for now.

Milk production was up 2.44% in Dec according to USDA estimates driven by a 12,000 head lift in herd size plus a 1.64% lift in per cow production. Nov cow numbers were revised down to show a 8,000 head decline from Oct. It appears they are still trying to sort out actual production which is likely to be in the @% range for Q4. this contrasts to milk-equivalent production of +1.6-1.05% for Oct-Nov. High beef:replacement price ratio will continue to encourage slaughter and constrain herd growth for the foreseeable future.

US$ weakness will keep export levels high with likely lifts in NDM pricing into spring. Stay tuned for a GDT update.

November Dairy Products

mhoekema — Wed, 04 Jan 2012 19:05:49 -0800

Happy New Year Everyone! I would reflect more on what it’s like to wear the two hats of dairy consultant and partner/manager but I just am flat out of time. For now, best wishes in your dairy businesses, it looks to be a good year ahead.

Combined with a very encouraging November cold storage (at least for cheese), November’s Dairy Products report sets the stage for what is gearing up to be a dairy happy new year notwithstanding the feed markets. Q4 cheese fundamentals, despite very active fortification levels, are resetting balance to levels seen in 2008. With a very active export market for NDM and level milk supply, cheese output + extraordinary sales reset inventory to a steady tightening of supply ahead of spring.

Nov cheese stocks fell 42.9 mil. pounds to 970.6 mil. pounds, a 4.2% drop. Output for the month of 886.5 mil. pounds was up +0.3%, using up to ~30 mil. pounds of additional fortification activity. Tentative disappearance is 952.3 mil. pounds up +1.35%. This drops the cheese pipeline in November to 31 days, a 1.5 day decline from October and 8 days below it’s July peak. Balance is clearly moving the pipeline to a tighter range and the low 30’s, if maintained, will be supportive of pricing particularly if milk flow continues to move overseas. As cheese demand continues to set records, look for stocks to consolidate further. Breaking below the bil. pound barrier was a big deal. Narrowing the pipeline supply is an even bigger one. If springtime levels fail to break over 35, demand will keep pricing elevate on significant feed cost pressure at the farm level.
NDM stocks lifted slightly to 146.3 mil. pounds, a +1.9% increase. Stocks remain at healthy levels although above year-ago shortage levels of 127.9 mil. pounds. Demand moved higher +5.1% in Nov (which is usually a slow month) to 117.4 mil. pounds. Prices are range-bound with international markets and this continues to export significant amounts of SMP. SMP output of 39.5 mil. pounds pushed dry milk output up +17.5% despite NDM up +3.0%. I’m estimating Nov exports to remain near 50% of dry milk output as has been the case most of 2011. Clearly inventory continues to follow a seasonal pattern and I expect pricing to likewise move. stocks are historically on the tighter range but production is also up on deflated fluid sales. There will be springtime NDM price lifts (on the low-season for NZ) but the range is muted until production moderates some on feed and/or weather pressures.
Butter output of 152.5 mil. pounds was up +14.3%, which is moderating from summertime peak of +31%. The good news is record demand (+9.2%) thus far keeps up with the output, pushing Nov stocks below 100 mil. pounds and within historically tighter levels. Both domestic food service/retail and exports are in play for this level of sales and at current bargain pricing, look for institutions to stock up ahead of Easter pricing lifts. Exports will continue to support/build domestic pricing in Q1 and robust sales at current pricing will keep inventories on the leaner side.

Balance is clearly on the tighter side than the market portrays. Feed cost pressure will continue to cap production growth through summer while it appears demand is no worse for wear on discounted holiday pricing. World markets are robust going forward although uncertainty remains on US$ cross rates due to ongoing EU issues. Balance tightening will keep support for prices through Q1, but stay tuned.

gDT closes lower

mhoekema — Wed, 21 Dec 2011 09:47:53 -0800

GDT’s 20 December trade closed a weighted –1.6% lower with drops in SMP (-3.2%), WMP (-1.5%), MPC70 (-6.7%) and BMP (-3.8%) while Cheddar and AMF were up +1.0% and +4.8% respectively. International fat markets are tightening while the US trade remains at recent lows as both production and sales set new records. This means prospects are good for a healthy export pull through spring and prices will adjust higher. There is still a wide disparity on dry milk although January spreads are nearly identical. The Dairy America contract is stuck around $1.40/lb through Feb which is going to weigh on CA milk pricing at that time. The domestic GNF contract has lifted some the past week but the spring/summer markets are trading 12-35 cents/lb. below GDT at the moment. If realized, the IV complex has $1-$3/cwt. gains in store through mid 2012 if butter stays flat. Adjusting for AMF, domestic butter trades 3-7 cents below GDT through summer although is at a 5 cent premium in Feb.

The drop in the dry milk complex reflects the strengthening of the US$ the past two weeks which is down ~2.25% against the euro, –1.4% against the NZD. Dry milk and butter pricing will continue to reflect the cross rates although there is evidence of supply consolidation at the end of peak season in NZ/AU. Again, the watch is out for cross rates and what happens in Europe.

gDT lifts on most counts

mhoekema — Wed, 07 Dec 2011 11:53:40 -0800

Global Dairy Trade showed significant strength across the butter/powder complex in its 6 December trade, pushing the weighted index 2.6% higher. SMP now trades 1.3976-1.7376/lb through the Jun/Aug contract while AMF trades from 1.81-1.847/lb. The spreads are similar to higher on US futures (CB) for butter (AMF is 99% fat) while there is now a 38 cent/lb. negative spread for US NDM (GNF) against SMP which widened ~10 cents from last month.

Given the domestic inventory for dry milk at its seasonal low, gDT results point to a steady lift in NDM pricing due to lifted demand and controlled stocks as US dryers continue to shift output to SMP from NDM. Lackluster fortification demand this winter, while dropping NDM pricing indexes, is clearly controlling cheese output and inventories. This points to a stronger CL IV complex from the NDM price index while butter, while volatile, should hold its own into spring depending on winter export activity.

Oct 2011 Cold Storage and Dairy Products

mhoekema — Thu, 01 Dec 2011 15:12:33 -0800

These reports clearly indicate a strong transition in the dairy markets towards heightened sales and tightening inventories across all commodity products (the notable exception being fluid sales). The summer spike in butter then cheese pricing has resulted in a fall-time sales surge which is finally bringing back inventories to longer-term price supporting levels. This is the first time in nearly 2 years where cheese inventories are pulling back towards non-burdensome levels and thus far robust sales into the holidays will add further consolidation ahead of spring. While the world market treads on the fragile movements of currency movements and the larger-than-life EU meltdown, domestic markets are not only moving in a rapidly strong fashion, the fundamental support may be sufficient to buffer potential US$ headwinds for the intermediate term.

Oct Cheese storage of 1.01 bil. pounds is the lowest of 2011 after a 28.8 mil. pound decline from Sep. This is the lowest level of cheese stocks since Nov 2010 and it is on track to fall below a bil. pounds of inventory for the first time since Feb 2010. With Oct cheese production of 896.1 mil pounds (+1.7%), disappearance lifted 2.5% as discounted prices spurned sales ahead of the holiday buying season. The pipeline dropped to its lowest level of 2011 to 32.5 days. Sales will continue their strength through year-end on robust holiday buying, which should keep the winter pipeline in the low 30’s. This also reflects the export pull on dry milk production keeping fall fortification supplies at a lower level than in previous winters. Whether the pipeline maintains the low 30’s through spring will depend not only on domestic sales (if current pricing holds will remain strong) but on continued strength and pricing of dry milk exports which is priced just high enough to temper powder fortification. Crossing the bil. pound threshold will also be a psychological boost indicative of stronger cheese pricing and I believe that is what is holding 2012 contracts near $17 despite the ongoing volatility in cash. Cheddar output in particular is pulling back and under current pricing formulas, will contribute to greater strength into Q1 2012 unless the financial world melts down.
Dry milk storage of 143.6 mil. pounds was down 7.1 mil. pounds from Sep. NDM disappearance was down -17.5% on a –12.1% drop in production. SMP output surged +140% as exports are poised to dominate dry-milk markets (+ and –) for the foreseeable future. NDM stocks are at healthy levels although would need to drop below 125 mil. pounds for price strength. With SMP lifting as a % of output, NDM stocks will be under more pressure from cheese vat fortification if current output mix trends continue. Dry milk output is also pulling back to +8.0% from summer peaks of 10-14%. As a result, any resumption of fortification (either due to price or tightening of condensed skim supply) will tighten NDM supplies at a faster pace than previous seasons. This puts NDM pricing outlook on a stronger footing than CME markets suggests. gDT results support dry-milk price strength through spring with the potential for inventory based lift if buying patterns change.
Butter stocks of 129.9 mil. pounds declined 21.2 mil. pounds despite a 20.1% lift in production in Oct. The fall price discounts are clearing moving product which is serving to keep stocks and pricing in a relatively moderate range. Export activity will be the deciding factor for spring price levels. If the US$ remains weaker, then prices will improve into summer as sales will keep stocks at supporting levels. Conversely if US$ strengthens considerably (say to 1.25 to the euro), production levels are so high that inventories will build to burdensome levels in a 3-6 mos. period. Food service demand is recovering some on some retail economic life. If the cross-rates hold, the domestic butter price is oversold and this will lead to pricing strength into the Easter buying season.

With cheese tipping the balance lower, year-end milk inventories may contract some and approach 2008 levels. This sets a strong fundamental picture for 2012 pricing, positioning dairy markets in its best position since the 2008 meltdown to catch any favorable economic winds if they ever decide to pick up. The holiday retail picture is quite bright despite obvious financial headaches everywhere else.

cash cheese

mhoekema — Thu, 17 Nov 2011 21:30:29 -0800

I’m at a loss to explain today’s cliff dive in futures, but one offer without a bid sends the trade in panic particularly when world financial markets are in a dour mood. While feed markets dove at a greater rate, one has to ask when there will be a margin possible in the 2012 dairy trade? This is not an academic question and will prompt a significant cramp in milk output as forage nearly equals grains on a per ton basis meaning there is there little room to maneuver through input substitutions forcing a fairly heavy cull depending on available forage inventories.

GDT had a very good week, which despite the desire for traders to punish NDM markets, 2012 SMP was up 1.1-5.7% with a nearly +15 cent/lb. gradient through the July contract. AMF also rebounded sharply to +8%. {Also of note the ‘Dairy America’ contract started to trade, which may provide more visibility to California forward pricing}. So to realize such lifts the US$ needs to maintain its 1.35-1.40 range on the Euro. So far the cheese vat has been actively fortifying on condensed skim pull back this summer. Slaughter rates are high which may mean powder will continue to enter the vat through the winter. The international market further out points to firming prices, but domestic suppliers seem eager to dump seasonally strong supply which keeps prices in the 1.50’s. The butter sell-off will be short-lived on tight world supplies and very brisk retail sales.

Cheese will continue its cyclicity but there will be some firming on the butter/powder complex through winter.

Dairy Products Sep 2011

mhoekema — Fri, 04 Nov 2011 09:26:41 -0800

While cheese output extended its summer pull-back, both butter and dry milk continues to extend output lifts. The equilibrium shows moderate (1.1%) gains in milk-equivalent output on both robust export and domestic sales.

Total cheese output of 867.3 mil. pounds was down 0.6% from Sep 2010, the third consecutive month of a pull-back in cheese output. The summertime milk shortfall is significant considering a surge in fortification activity to fill-in the milk production gap. 200-300 mil. additional pounds milk equivalent of NDM entered the vat from Jul-Sep. Sep disappearance reversed a 2-month fall in sales tentatively posting +1.2% lift in sales as prices collapsed in late Aug. The pipeline of 34.7 days is approaching 2010 lows and may further contract through winter as production is not keeping pace with sales. The pipeline needs to approach 30 days for sustained price support and that is not a likely scenario through spring although inventories will tighten rather than widen. The recovery in sales contributed to current price lifts but this is viewed as an extension of cyclical patterns to date.
Dry milk output of 139.5 mil. pounds was up +10.4% on a +108% lift in SMP output while NDM declined –5.0%. NDM sales continued to significantly lag 2010 as Sep disappearance was off –10.1% after Jun-Jul lifted 13-16%. Sales are within a 3 year range and still high historically. This is reflected in stocks of 150.9 mil. pounds, down 17.0 mil. pounds from Aug and 27 mil. pounds over Sep 2010 stocks. While stocks are ahead of year-ago levels, NDM production is down and gDT price consolidation traded a ~13 cent/lb. lift in SMP pricing from now through the northern summer. Exports are expected to remain robust as peak-NZ production season winds down into Q1. Domestic pricing may consolidate further through Q4, but price movements will be more sensitive to US$ cross rates. While many financial markets want US$ strength, the fundamental US economy pressure from the Fed printing press will keep the value range bound unless Europe cascades into a full-on meltdown. All this is possible as current events reflect.
Butter output of 137.6 mil. pounds was up +24.6% pushing YTD output +16.9%. Exports have been taking a majority of this excess capacity overseas although summertime price lifts constrained sales. I expect significant gains on discounted pricing through Q4. While stocks are heavier than year-ago levels, they are not approaching burdensome levels as sustained sales growth is keeping stocks within seasonal movement patterns. Butter pricing is going to depend on the level of export sales through Q4. The US$ is in the right place to keep product moving but a healthy NZ production season has dampened prospects for Q4 pricing strength. Domestic Sales prospects are excellent, mostly as discounts to the 1.80’s have enabled retail features on top of signs foodservice is gaining some traction. The balance should keep a floor on pricing into Easter but the prospect of volatility is real as any pull-back in sales is leveraged by very high output levels. As fluid sales continue to contract, butter output will post further gains.

Butter faces the most challenging prospect through winter but the cheese vat may need cream supply as on-farm price relationships remain conducive to production pull-back from both herd size and per-cow productivity pressures. Exports will keep a back-stock on both dry milk and butter should there not be a Euro meltdown. Cheese remains cyclical until the pipeline shrinks further but healthy sales and a sustained pull-back in output improves pricing prospects for mid-late 2012.

Pipeline, yen, and MF

mhoekema — Mon, 31 Oct 2011 08:46:00 -0800

With dairy fundamentals as strong as it has been for fall in some years, macroeconomic factors are going to offer pressure and likely range-bound both dairy and feed complexes in the immediate future.

The NZ Maui pipeline has been restored and at best estimate, 3 days of milk supply has been lost as a result of the leak. Not insignificant but that event is now finished.

The Japanese government has intervened with promises to keep its sales of yen in an effort to devalue the currency as traders flock away from the Euro. This is leading to some strengthening of the US$ by default despite weakness last week as a result of the EU debt deal. This is going to keep a floor on US$ value and perhaps lift the value, keeping any gains in NDM pricing muted through Q4.

MF global, a rather small broker institution declared bankruptcy today, a direct casualty of the EU debt crisis (their holdings bet the wrong way). Many are viewing this as a mini-Lehman and wonder if there are others stateside as exposed to the EU’s ongoing financial woes.

This is going to keep dairy and feed markets cautious if not declining for the foreseeable future. The currency rate movement is probably as important as any for the dairy complex. An extended pullback in grains is expected if further weakness in financial markets absent QE3 extends through the week.

Fonterra ongoing gas shortages

mhoekema — Fri, 28 Oct 2011 06:29:10 -0800

Fonterra’s north island operations continue to be hampered with the closure of a major gas pipeline. For at least two days, 13 of it’s 15 plants in the area were shut down, forcing ~50 mil. litres of milk to be dumped. There is a smaller backup line in place, but 1/3 of the milk in the area cannot be processed. The area produces over 30 mil. litres per day, so over 20 mil. pounds per day at the moment are not being processed. This will have a significant effect on the world markets. Stay tuned.

http://nz.news.yahoo.com/a/-/top-stories/10886421/back-up-gas-line-supplying-fonterra-operations/