Update highlights
  • October setting up for more negative PPDs
  • NMPF: Dairy’s unusual year to stabilize?
  • Dairy cow slaughter hits four-year low in August
  • Rabobank: Dairy in a delicate balancing act
  • Coming this week: August DMC margin

October setting up for more negative PPDs

The recent run-up in block cheddar cheese prices is creating the potential for depooling and negative producer price differentials (PPDs) in October.

Natzke dave
Dave Natzke
Editor / Progressive Dairy

On Sept. 23, the USDA announced the October 2020 Federal Milk Marketing Order (FMMO) Class I base price fell more than $3 from September to $15.20 per hundredweight (cwt). It’s down $3.24 from the previous month and $2.64 less than October 2019.

Through the first 10 months of 2020, the Class I base price average is $16.50 per cwt, about 14 cents less than the same period a year ago.

Meanwhile, the approval of up to $1 billion for a third round of the USDA’s Farmers to Families Food Box Program has boosted cheddar block prices and pushed Class III milk futures higher.

After an extreme inversion in Class I base and Class III prices in June and July leading to widespread depooling and extremely negative PPDs, FMMO milk class pricing has returned to a somewhat normal position in August and September.

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We know the September Class I base price is $18.44 per cwt. Class III and Class IV prices for September will be announced on Sept. 30. As of Sept. 25, the Chicago Mercantile Exchange (CME) Class III milk futures price closed at $16.33 per cwt for September; the Class IV futures price closed at $13.76 per cwt.

October FMMO Class II, III and IV prices won’t be announced until Nov. 4. However, as of Sept. 25, October Class III milk futures traded at $18.88 per cwt, about $3.68 per cwt higher than the announced Class I base price.

The gap between Class III and Class IV futures prices remains wide: As of Sept. 23, the October Class IV futures price was trading at $13.76 per cwt, about $5.12 per cwt less than the Class III price.

After sitting below $2 per pound for much of August, cheddar block prices moved back above $2 on Sept. 3, posting small increases through the first half of the month. On Sept. 17, the USDA announced the third round of the Farmers to Families Food Box Program contracts sending cheddar block prices up more than 22 cents per pound the following day. CME cheddar block prices peaked at $2.6475 per pound on Sept. 21, averaging about $2.58 per pound for the week.

NMPF: Dairy’s unusual year to stabilize?

Very little about 2020 has been “normal,” marked by decidedly unique patterns of milk and dairy product prices and unusual market behavior among key dairy components. Producers are experiencing a roller coaster ride requiring a strong stomach and great patience as markets eventually return to normal.

Still, the economic outlook is much brighter than in the darkest days of the spring, National Milk Producers Federation’s (NMPF) Peter Vitaliano notes in the Dairy Management Inc./National Milk Producers Federation September Dairy Market Report.

For more information on commercial use, dairy trade, milk production, product inventories, prices and margins, click here.

Dairy cow slaughter hits four-year low in August

Dairy cull cow slaughter continues to slow, according to the USDA’s Livestock Slaughter report.

August 2020 dairy cull cow slaughter at federally inspected plants was estimated at 225,300 head, down about 41,300 from August 2019 and 8,400 less than July 2020. The August 2020 estimate is the lowest for any month dating back to July 2016.

August 2020 had one fewer weekday and Saturday (26) compared to August 2019 (27). On a daily basis, July 2020 dairy cow slaughter was down about 1,200 head from the same month a year earlier.

Year to date, 2020 cow slaughter (2.051 million) is now down about 110,000 head from January-August 2019.

Based on the USDA’s Milk Production report estimate of 9.36 million dairy cows in U.S. dairy herds in August, the monthly culling rate would be about 2.4%.

Heaviest dairy culling during August 2020 occurred in the Upper Midwest (Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin), where 60,100 dairy cows were removed.

That was followed by the Southwest (Arizona, California, Hawaii and Nevada) at 50,300; 36,900 head in Delaware, Maryland, Pennsylvania, West Virginia and Virginia; 25,400 head in Alaska, Idaho, Oregon and Washington; and about 24,100 head in Arkansas, Louisiana, New Mexico, Oklahoma and Texas.

Rabobank: Dairy in a delicate balancing act

The global dairy industry faces a delicate balancing act as milk production growth collides with a recalibration of retail, food service and export demand, according to the latest quarterly market summary for Rabobank.

Rabobank dairy analysts forecast fourth-quarter milk production among the “Big-7” global dairy regions (the U.S., European Union, China, South America, Australia and New Zealand) to increase about 1.3% over the same period a year ago. That’s followed by 1% and 0.8% increases in the first two quarters of 2021, respectively.

COVID-19 remains a cloud over both domestic and export markets in terms of both immediate demand and longer-term economic recovery. The resilience in dairy product demand “has been undeniable, demonstrating the nutritional importance of dairy in diets across the globe."

Coming this week: August DMC margin

The USDA releases numbers related to the Dairy Margin Coverage (DMC) program margin for August milk on Sept. 30. Based on futures prices as of Sept. 25, there won't be any indemnity paytments at any insured levels. The DMC Decision Tool projects an August margin of $10.57 per cwt.

Looking ahead, the current projections point to a DMC margin of $8.26 per cwt on September milk, triggering DMC indemnity payments at the $8.50, $9 and $9.50 per cwt coverage levels. Check back for details later this week.  end mark

Dave Natzke