The “Sequestration” has begun and, like the “Y2K scare” in 1999, the sky didn’t fall. FC Stone’s Feb. 28 e-Dairy Insider Opening Bell warned that the federal budget cuts could affect dairy contracts. “The CME Group told customers a week ago that the mandatory spending cuts could affect physical delivery and cash settlement mechanisms of some CME livestock and dairy products.”

The Feb. 27 Daily Dairy Report stated that Sequestration budget cuts were put in place as part of a deal to raise the debt ceiling in August 2011 and warned that “If the cuts are not stopped, USDA may be forced to reduce every line item in its annual budget by 5 to 6 percent, but because the cuts won’t be made until the second half of the year, they could be even larger, according to U.S. Agriculture Secretary Tom Vilsack.”

“Daily Dairy Report analysts believe that how a sequestration is implemented will determine its impacts. For example, California has furloughed state employees in the past, typically on a Friday. When dairy price announcements and furlough days coincided, the announcements were postponed until the next working day. USDA-surveyed dairy product prices used to calculate the Class III and IV prices are typically released on a Wednesday, a Friday-furlough program would not impact the price reports. In addition, given that USDA user fees fund dairy inspectors; the impact on grading product for the CME spot market would likely be minimal.” 

So, if the world doesn’t end, we’ll be back next week with more dairy news.

Farm gate milk prices fell again. The USDA announced the February Federal order (FO) benchmark Class III price at $17.25 per cwt., down 89 cents from January, but still $1.19 above February 2012 and equates to about $1.48 per gallon. The two-month average now stands at $17.70, down from $16.56 a year ago and $15.24 in 2011. 

Class III futures show more fall to come. The March contract was trading late Friday morning at $16.83 per cwt. April was at $17.08; May, $17.43; June, $17.65; July, $18.05; August, $18.30; with a peak at $18.40 in September. The Class IV price is $17.75, up 12 cents from January and $1.83 above a year ago.

The AMS-surveyed cheese price averaged $1.6623 per pound, down 8.6 cents from January. Butter averaged $1.5438, up 3.7 cents. Nonfat dry milk averaged $1.5559, down slightly, and dry whey averaged 63.93 cents, down 1.1 cent.

California’s comparable 4b cheese milk price is $15.41, down 43 cents from January, $1.99 above a year ago, but $1.84 below the FO Class III price, even with the temporary price boast just approved by CDFA. Its two month average now stands at $15.63, down from $15.85 a year ago and $17.19 in 2011. 

The 4a butter-powder price is $18.01, up 93 cents from January and $2.50 above a year ago. Its two month average is $17.55, up from 13.83 in 2912 and compares to $14.71 in 2011.

There’s lots of butter in storage. USDA’s latest Cold Storage report put Jan. 31 stocks at 206.6 million pounds, up 53.6 million pounds or 35 percent from December and 36.3 million or 21 percent above January 2012.

American type cheese, at 643.6 million pounds, was up 1 percent from December and even with a year ago. Total cheese stocks, at just over 1 billion pounds, is up 1 percent from December and 1 percent above a year ago.

USDA increased its coverage of cheese stocks, according to Daily Dairy Report (DDR) Editor Mary Ledman in her Feb. 22 issue and Daily Dairy Discussion. What that means, she explained, is that USDA found additional warehouses to survey so comparing 2013 stocks to previous years will be a “struggle.” As a result, 2012 levels were increased 30-40 million pounds in any given month.

She said the American cheese inventory is comparable to year ago levels, but butter stocks are up about 20 percent and “we’ve had very few Januarys where the butter stock level has topped 200 million pounds.”  She added the caveat that butter stocks around the world are not real strong so the additional stocks are “comforting to the market at this point because the anticipation of lower milk production in the West where a lot of butter is produced has the market nervous about butter availability in the second half of the year.”

FC Stone dairy broker, Dave Kurzawski, wrote in his Feb. 25 eDairy Insider Opening Bell that “Cheese stocks typically grow in December, but Friday’s report showed a larger increase than normal,” and he warned; “That could provide a lid on upward price movement.” 

Kurzawski added that China’s cut in its tariff on dairy-based infant formula from as high as 20 percent down to 5 percent will become effective May 1. “This puts Australian producers on comparable footing to New Zealand producers, who had benefited from the New Zealand-China trade agreement.” 

FC Stone dairy economist, Bill Brooks, said the across-the-board tariff reduction can help any supplier, but Australia is in position to benefit first because of its transportation advantage. He expects the reduced Chinese tariff could benefit dry products, probably supporting whey initially. 

Cheese prices are unsettled with buyers and sellers continuing to look for a clear market direction, reports USDA’s Dairy Market News (DMN). Uncertainty over future cheese supplies for the second and third quarter is adding to the confusion, it said.

Chicago Mercantile Exchange 40-pound cash block cheese closed March 1 at $1.5750 per pound, down 5.25 cents on the week, but still 9.5 cents above a year ago. The 500-pound barrels closed at $1.56, down 7 cents on the week and 8 cents above a year ago. Nine cars of block traded hands on the week and 10 of barrel. The lagging, AMS-surveyed U.S. average block price inched up 0.4 cent, to $1.6620. Barrel averaged $1.6285, up 3.8 cents.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Lee Mielke may write to him in care of this publcation.