Dairyline
By Lee Mielke

July butter stocks totaled 199.6 million pounds, up 2 million pounds or 1 percent from June but 63.2 million pounds or 24 percent below July 2009, according to preliminary data in USDA’s latest Cold Storage report.

The American cheese inventory, at 638.6 million pounds, was up 11.6 million pounds or 2 percent from June and 33.6 million or 6 percent above a year ago. June revised estimates were lowered nearly 1.4 million pounds.

Total cheese stocks amounted to 1.049 billion pounds, up 23.5 million pounds or 2 percent from June and 48.6 million pounds or 5 percent above a year ago. June revised estimates were lowered nearly 1.3 million pounds.

The market pretty much ignored the data. Two trades on Aug. 23 pushed the cash butter price up 7 cents, to $2.11 per pound.

It closed Friday at $2.18, up 14 cents on the week, $1.01 above a year ago, and the highest since 2004.

Block cheese closed the last Friday in August at $1.6950 per pound, up 4.75 cents on the week, and 32.75 cents above that week a year ago. Barrel closed at $1.6650, up a nickel on the week, and 32.5 cents above a year ago.

One car of block traded hands on the week and four of barrel. With two days left in the month there’s only been eight cars of cash cheese sold in August. The lagging NASS-surveyed U.S. average on block cheese hit $1.6029, up 0.6 cent. Barrel averaged $1.6076, up 1.6 cents. NASS powder averaged $1.1493, up 1.4 cents, and dry whey averaged 35.53 cents, down 0.3 cent.

Downes-O’Neill dairy broker Bill Brooks said that it’s not out of the question that butter can be above $2 or even higher, but it doesn’t happen often. By the way, the record high for butter was $2.81 on Sept. 4 and Sept. 18, 1998, but then it came crashing down, according to Brooks, who warned that will likely happen again.

Butter stocks at that time were running 25-40 million pounds, according to Brooks, whereas Friday’s Cold Storage report put July 31 stocks at almost 200 million pounds “so a big difference in our reserve supply.” He said it’s even above the 2004 level which was the last time butter was this high. The inventory at that time was in the mid-170 million pound range.

“There’s been a lot of demand for cream,” Brooks explained, “And there’s just a whole different outlook as far as where the market is at and where it’s going because our reserve supply is still very adequate.”

He’s not sure if this high price will attract imports because there isn’t a great deal of butter supply on the world market but the Oceania region’s production season is beginning so that will increase the world supply and could potentially bring in imports but it will likely spur some substitution for butter in the United States.

The higher butter price could pull cheese prices higher as well, according to Brooks, but he cautioned us to remember that we have a large inventory of cheese now and is why there’s a widening gap between cheese and butter.

The latest commercial disappearance data provides some insight. Butter demand in July was up 10.6 percent from June and 2.1 percent above a year ago. Cheese demand in the first six months of 2010 was up 2.9 percent, with American type up just 0.3 percent.

Tariffs on U.S. exports
Last month, the Mexican government announced that it would impose tariffs of 20-25 percent on several major categories of U.S. exports to Mexico, including many cheeses. At issue is U.S. compliance with NAFTA obligations to provide Mexico with cross-border trucking access into the United States.

Alan Levitt, editor of the CME’s Daily Dairy Report, said the United States has failed to honor its NAFTA obligations now for 15 years. Mexico challenged the U.S. position and won, so Mexico has been imposing retaliatory tariffs since March 2009. But it is a rotating list, and now cheese is taking its turn on the list.

The cheeses involved include Cheddar, Mozzarella, Gouda, Provolone, Colby, Monterey Jack, cream cheese, and others. Levitt said this action affects about 90 percent of U.S. cheese exports to Mexico. In the last three years, that would be about 7 million pounds of cheese per month, Levitt said, “a pretty significant volume.”

He said the United States had a great opportunity in Mexico. Because of NAFTA, the United States was able to export tariff-free whereas U.S. competitors were paying higher tariffs. That gave the United States a competitive advantage, he said, and the United States had built up its market share to more than 60 percent, “now it really puts us in a tough spot.”

Mexico had been the largest U.S. market for dairy exports and still is, Levitt said.

During the last three years, about 30 percent of U.S. cheese exports went to Mexico. The United States had been running at record levels of cheese exports this year, Levitt reported. Some of that is due to the CWT program but Mexico is not on the CWT list, Levitt concluded, “So I believe we will continue to move cheese, but we’re almost sure to see a drop in cheese exports to Mexico.”

National Milk’s Chris Galen said that, when the NAFTA agreement was signed more than 15 years ago, the United States agreed to allow Mexican long-haul truck carriers access to the U.S. market. There hasn’t been any progress made in doing that, so Mexico is permitted under the NAFTA agreement, to penalize U.S. exports to that country until the issue is resolved.

National Milk is focused on pressuring the Obama Administration to resolve the stalemate, Galen said, so we’re no longer in violation of the NAFTA agreement. The Federation is generating letters that dairy farmers can send to the White House, he said, asking for expeditious action on this matter.

Many believe the issue revolves around the safety of the trucks coming up from Mexico. Others charge that it’s because of union opposition and politics. Galen said the Mexican trucks would have to meet the same safety requirements that U.S. trucks do, but “it’s no different than if Mexico was using a safety issue to bar our food exports to Mexico.”

“This has been a sore point for many years,” he concluded, “Mexico does have the right to impose tariffs on selected groups of foods exports and it’s not just dairy and cheese products, pork is included, pistachios, and last year it was another set of products so they’re going to continue to keep pressure on the U.S. to do something about this so we need to have the U.S. dairy industry put pressure on the White House to take action to resolve the issue.”

The CWT program announced the acceptance of six export assistance bids to sell cheese and butter to customers in Europe, the Middle East and North Africa. That pushed the 2010 export total on cheese to 41.9 million pounds plus 32.8 million pounds of butter and anhydrous milkfat.

(Please refer to the newspaper for the remaining portion.)