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Levitt: Dairy industry in midst of building inventory
By Lee Mielke

Cheese and butter stocks are abundant, according to preliminary data from the USDA’s latest Cold Storage report. The March butter inventory amounted to 168.8 million pounds, up 20.3 million pounds from February 2006, and 36.4 million above March 2005.

American type cheese stocks totaled 572.9 million pounds, up 24.4 million pounds from February and 45.6 million above a year ago. The total cheese inventory, at 808.8 million pounds, was up 37.8 million from February, and 59.5 million above those a year ago.

Al Levitt, editor of the CME’s Daily Dairy Report, says analysts get a kick out of the third week of the month because they get so many reports that provide new numbers to digest and talk about. He said that last week’s Milk Production report indicates that production “continues to rage along unabated, with no slow down in expansion, in fact expansion seems to be accelerating, even with the low milk prices so apparently the signal still hasn’t reached the farm yet.”

That also continues to play out in increased inventories. Cheese stocks are at their highest levels ever for this time of the year, according to Levitt, and over the past five to seven years, commercial American cheese stocks have increased about 65 million pounds in April, May, June, and July.

“We’re still at the point where we’re building inventory,” he said, “If that holds true to pattern this year we will go into August with inventories at record levels close to 640 million pounds and that could hang over the market all year.”

That makes him a bit pessimistic about any kind of turn around in the near term, he said.

I asked why cash market prices aren’t even lower, considering the bearish news. Block cheese held at $1.16 for over two weeks. Levitt pointed out that it’s only a few cents above support but “demand has been decent.” He said that it hasn’t collapsed, especially in food service, “So cheese appears to be moving and summer is starting to creep up on us and more fat is moving into ice cream production so that leaves a little less cream available for butter production.”

It’s not a short or tight situation, he said, but “people seem to be comfortable with the level that prices are at and no one wants to see cheese or butter prices down at a dollar a pound. We’re at an equilibrium kind of level now.”

I asked Downes-O’Neill dairy broker, Dave Kurzawski, in Wednesday’s broadcast to explain the strength in the cash dairy markets, considering the bearish news. He credited the summer grilling season for the strength in barrel cheese.

Barrel represents processed cheese, he said, and there may be a slight tightness in the market but the strength in butter is more of an anomaly, according to Kurzawski, and he doesn’t expect to see the price strengthen much more.

As to what this means for dairy producer risk management strategy, Kurzawski said that, “Given the fact that sell orders have been lighter than buy orders, given any kind of significant move in the market, there may be some room here in the next 30 days to get some of their milk locked up for the second half of 2006.”

The situation right now is that we have a 5.5 percent increase in milk production from a year ago, he said, and American cheese stocks are up almost 9 percent from a year ago, so “These are real bearish reports,” but he adds that the market may have worked some of that into the price. “We have come up over the past week and there is premium out there. Dairy producers should not discount that.”

Some believe there will be some draught this summer and second half 2006 milk production could take a hit. Kurzawski admitted that possibility exists but “Given the current trend that we’re looking at, the buy is to the down side for price.”

Meanwhile, 2005 cheese production totaled 9.13 billion pounds, according to the USDA’s latest Dairy Products Summary, up 2.9 percent from 2004.

American type cheese totaled 3.81 billion pounds, up 2 percent from 2004 and accounted for 41.8 percent of the cheese total. Italian varieties, at 3.8 billion pounds, were up 3.9 percent from 2004. Mozzarella accounted for 79.4 percent of the Italian production category.

2005 butter totaled 1.35 billion pounds, up 8.1 percent from 2004. California accounted for 30.3 percent of that total.

2005 milk production totaled 177 billion pounds, up 3.5 percent from 2004. Production per cow averaged 19,576 pounds, up 609 from 2004. The average number of milk cows on farms was 9.04 million head, up 29,000 from 2004.

Cash receipts from marketings of milk totaled $26.7 billion, down 2.4 percent from 2004. Producer returns averaged $15.20 per hundredweight, down 5.8 percent from 2004. Marketings totaled 176 billion pounds, up 3.6 percent.

CWT dairy exports this week included bids from Minnesota-based Land O’ Lakes on 220,000 pounds of butter to Lebanon, 264,000 pounds to Hong Kong and 88,000 pounds of Mozzarella cheese to South Korea. A bid was also accepted from California Dairies of Artesia to export 220,000 pounds of butter to Russia.

That put 2006 butter exports at 6.04 million pounds. Cheese exports total 2.69 million, plus 752,400 pounds of anhydrous milk fat and 2.1 million pounds of whole milk powder have been exported so far under the farmer-funded program.

Cash traded block cheese closed the final Friday of April at $1.16 per pound, unchanged on the week, but 28.5 cents below a year ago. Barrel closed at $1.1325, also unchanged on the week, but 25.25 cents below a year ago. Four cars of block were traded and none of barrel. The NASS U.S. average block price slipped to $1.1477, down 2.1 cents. Barrel averaged $1.1366, down 0.9 cent. Butter climbed to $1.20 on Tuesday but relapsed on Thursday and closed Friday at $1.18, up a penny on the week, but 21.75 cents below a year ago. Only one car was sold all week. NASS butter averaged $1.1394, up 0.1 cent.

There were 10.6 million pounds of nonfat dry milk purchased under the support program. That put the cumulative total at 20.4 million, compared to 31.8 million a year ago.

Dairy producers face a May 17 deadline for letting their local Farm Service Agency office know what months they want their Milk Income Loss Contract (MILC) program payments to begin. You’ll recall Congress extended the program through September 2007. National Milk economist, Roger Cryan, said in Thursday’s DairyLine that the payments are still capped at 2.4 million pounds per fiscal year per producer and are triggered when the Class I base price is below $13.69, however the extended program only pays 34 percent of the difference instead of the original 45 percent.

But producers have more flexibility in picking a start date, he said. If a producer signs up before May 17, he can pick any start date in the fiscal year, even going back to December 2005. If he waits until after May 17, he can only pick from July, August, and September 2006.

Larger producers will want to carefully weigh when to start their payments to maximize their returns so they will need to determine how many months of their farm’s milk production it takes to arrive at the 2.4 million pound cap.

The MILC payments range from 4 cents for December 2005 to 92.48 cents for May. There were no payments in October or November. He projects the June and July pay outs to be close to 90 cents, slipping to about 87 cents in July, 77 cents in August, and about 65 cents in September.

This farm news was published in the May 3, 2006 issue of Farm World.