Weekly Update

Alliance of Western Milk Producers

June 27, 2008          volume 25, 2008  

Commodities used in California Formulas:                     Other prices of interest:

                                                Friday price

                                                   $/lb   change                                      $/lb  change

CME Block Cheese                 1.9200-.0400               CME Barrel Cheese* 1.9600+.0100

CME Butter                             1.5450+.0425              Dry Whey (mostly)**  .2800   nc    California plant NDM                     1.3290-.0028               WPC 34%**               .8900 -.0400

                                   

*Barrel cheese is not used in California formulas but is an important part of the Federal Order pricing and therefore is included here.  The Friday price is used here.

 **Dry Whey (average of the Western ‘mostly’) is used only in the Class 1 formula.  WPC 34 (Whey Protein Concentrate 34% Protein) is the average of the weekly price report from DMN but is not used in California formulas.  The appropriate valuation of whey in the California 4b formula is a topic of interest.  Thus, we will report and comment upon these two whey values for the foreseeable future.

 Butter – a star achiever this week.

 Another high for the year.  There were nice increases every day but Friday.  Overall inventories of butter are down this year compared to last year, in spite of high production levels.  DMN provides this observation:  “ …handlers concerned about the drawdown of inventories at earlier and faster rates than anticipated”.  Part of the drawdown in inventories of butter is the strong demand from Class II demand.  Japan ’s emergency purchase of butter (apparently from everywhere but the US ) is impacting world demand.  

Cheese – does Friday bump in barrel signal turn upward?

Thirteen loads of Block cheese were sold this week.  Four loads on Monday pushed the price down 2 cents as did the four loads on Tuesday but the 5 loads sold on Thursday and Friday were absorbed without further price erosion.  On the other hand Barrel with only 2 loads sold, held even after Monday’s 2 cent drop and then jumped 3 cents on Friday.  Barrel is now 4 cents higher than Block.  Market comment is that export interest is increasing at this price level.  

Nonfat Dry Milk – price “resistance” at $1.50

CWAP prices are off just a quarter cent this week on reasonable volumes.  The DMN “mostly” quote for NFDM at $1.4323 is unchanged from last week.  DMN comments that producer stocks are in good balance.    

Whey products – WPC 34 drops 4 cents.

Dry Whey prices hold level this week at 28 cents but there has been steady erosion in the Dry Whey futures.  The average price for the rest of this year decreased by 1.3 cents per pound.  WPC 34 buyers appear to be holding off purchases until prices find a bottom.  

 SB 201 (Florez) Fresh Raw Milk Act of 2008

As expected the Raw Milk Act passed out of both the Public Health and Ag committees this week.  At each committee hearing it was noted that the bill needed some additional tweaking to make sure that CDFA, which has the primary responsibility to administer the new law, has a chance to participate in the drafting process.  CDFA has been reluctant to participate because they have been - and still are - the target of multiple lawsuits filed by Organic Pastures – the larger of the 2 raw milk dairies in California .  It is likely to be several weeks before we know the final fate of this bill.  

Undersecretary George Gomes will retire as of July 1.

Mr. Gomes has good and understandable reasons for retiring but we certainly wish it were not so.  He has been an excellent administrator and has been willing to take on the tougher challenges and make the tough decisions.  He will be missed.  We wish him well in his retirement.  

Corn Con: Errata, rain, feed costs and sugar

Monday June 23, 2008 was the end of the comment period as I noted last week.  But I was not correct about Stephen Johnson being up against a deadline.  He has some added time until he is required to respond to the petition of Texas governor Perry.   

It is raining again in much of the corn belt.  So after just a few days of nice weather during which futures prices for corn dropped 3 out of 4 days last week, prices shot up as the rain started to fall.  Dec 08 corn hit a high of $7.96 per bushel on Friday.  March 09, May 09 and Jul 09 are all over $8.00.  That is the corn that is now in the ground and trying to grow.  That is the corn that must supply next year’s 10.5 billion gallon ethanol mandate!   

Let’s take a moment to look forward to May 09.  Here are your choices for feed for your cows:  Corn $8.00 per bushel.  Wheat $10.00 per bushel.  Soybeans $15.50 per bushel. Both corn and soybeans are at all time record highs!  On the other hand the May 09 BFP contract has settled at $19.50.  I cannot make this compute and something just has to give!  Who could have imagined just two years ago that a milk price of $19.50 would be inadequate?  But there you have it.  These numbers have got to be playing in the minds of many dairymen as they try to determine whether or not to put a bid into CWT.  Sell the cows, continue to raise corn and/or soybeans and spend every winter in San Diego !  Bids must be in by Monday, June 30.   

Ethanol prices have been climbing in response to the higher corn prices and for the past few weeks have settled in the range of $2.80 cents per gallon.  I have complained, correctly I believe, a great deal about the 54 cent tariff we place on incoming ethanol but even with it in place, there will be a price level in this country that will allow the importation of sugar-based ethanol.  There is also a 2.5% duty tax.  Let us go backwards with these numbers to calculate the price at which ethanol from Brazil can start to come into our country after paying the freight and taxes.  

            Calculation of est. trigger price for Brazilian ethanol imports                       

                        US price of ethanol       $2.80 per gallon

                        Less: tariff                     $0.54  

                        Less: duty (2.5%)         $0.07  

                        Less: Freight                 $0.16  

                        Value in Brazil             $2.03 per gallon  

This formula may have some flaws in it, but it shows that at the point sugar-based ethanol can be imported there is effectively a cap on corn prices in this country.  We must be nearing that point.  That is horrible news to those who have invested in ethanol plants.  They like the dairymen face the prospect of increasing corn costs with no ability to increase their sales price.  Interestingly, they may become allies in the effort to get rid of the mandates since they can only exist profitably if corn costs are lower.  

In trying to find the current price of ethanol from Brazil , I googled:  “Ethanol, world price”.  What a surprise!  That entry takes you to sugar.  The world price of ethanol is driven directly by the value of sugar.  The ability of sugar growers of the world ( India is really big in this crop) to respond to good prices is remarkable.  Many countries in Africa are becoming very active in the production of sugar cane.  Apparently the adage we use frequently that “Money Makes Milk” also applies to sugar.  

The current price of sugar on the world market is 11.8 cents per pound.  Corn at $8.00 a bushel is 14.3 cents a pound.  The US has a very protected sugar market and our producers get a price of 24 cents (more in the new Farm Bill).  It too is protected by tariffs but the NAFTA agreement will allow sugar to come into this country from Mexico . Several weeks ago ( May 16, 2008 ) I described the new ‘buy high-sell low’ sugar protection program contained in the new Farm Bill.  There is a sweet deal in this for those with trucks, contacts and plenty of nerve. Sugar is a great additive to corn-based ethanol plants.  Every 16 pounds of sugar will replace 20 pounds of corn.  Note to sugar delivery trucks: On your way back to Mexico for more sugar please bring the freed-up corn to our dairies and feedlots.  The incentive to use sugar in US ethanol plants is there and the opportunity and economics are in place.   

Economics is not a static science.  Things happen and people react.  The initial ripple (in this case ethanol mandates) may be political (in this case irrational) but the response will be firm and rational.  Ethanol, even that which is made from corn, does have a place in our overall corn demand structure but that place must be earned – not mandated.  Lowering the RFS by 50%, Mr. Johnson, will allow real economics forces to work out the proper allocation of product.   

CARES Monthly report attached

It is a good read and nicely covers the issues surrounding the “allure” of manure digesters.   

Next Week

Friday is the 4th of July.  Unless there is really big news to share do not expect the next issue of the Weekly Update until July 11, 2008 . 

 

Bill Van Dam