The world witnessed war as Russian troops invaded Ukraine

The world witnessed war this week as Russian troops invaded Ukraine. Energy markets shot higher as did grains. Russia is the world’s largest wheat supplier, according to StoneX, and Ukraine is the world’s third largest exporter of corn and fourth largest exporter of wheat. What happens next is anyone’s guess as well as how effective sanctions against Russia will be. Russian President Vladimir Putin says Russia is “ready to negotiate with Ukraine.”

Meanwhile, U.S. milk production dropped for the third month in a row from a year ago. The Agriculture Department’s latest Milk Production report shows preliminary January output at 19.05 billion pounds, down 1.6% from January 2021, steepest year over year decline since March 2004, when there was a shortage of recombinant bovine somatotropin, according to Dairy and Food Market Analyst editor, Matt Gould in the Feb. 28 ‘Dairy Radio Now’ broadcast.

Output in the top 24 producing states totaled 18.2 billion pounds, down 1.4%. Revisions lowered the original 50-State December estimate by 35 million pounds, now put at 18.8 billion pounds, down 0.3% from a year ago.

January cow numbers totaled 9.368 million head, down 5,000 from December, eighth consecutive month they were down from the previous month, and were 82,000 head below a year ago. The December count was revised 2,000 head lower. The milking herd has dropped 139,000 head from its peak in May 2021.

January output per cow averaged 2,034 pounds, down 15 pounds or 0.7% from 2021.

Final data pegs 2021 milk output at 226.3 billion pounds, up 1.3% from 2020. Cow numbers averaged 9.45 million, up 60,000 or 0.6% from 2020, with output per cow averaging 23,948 pounds, up 171 pounds from 2020. The average annual rate of output per cow increased 10.2% from 2012, according to USDA.

California’s January output totaled 3.5 billion pounds, down 68 million pounds or 1.9% from a year ago, thanks to a 40 pound drop per cow. Cow numbers were unchanged. Revisions lowered December output by 25 million pounds.

Wisconsin output totaled 2.7 billion pounds, down 8 million or 0.3%. Cow numbers were up 11,000 head but output per cow was down 25 pounds.

Idaho was up 0.6%, on 4,000 more cows. Output per cow was unchanged. Michigan was down 3.5% on 10,000 fewer cows and a 30 pound drop per cow. Minnesota was down 1.0% on a 25 pound drop per cow, though cow numbers were up 1,000. New Mexico output plunged 12.1% on a drop of 42,000 cows. Output per cow was up 10 pounds.  

New York was off 0.6% on 5,000 fewer cows though output per cow was up 5 pounds. Oregon was down 1.4% on a 10 pound drop per cow and 1,000 fewer cows. Pennsylvania was down 2.9%, on 6,000 fewer cows and 30 pounds less per cow. South Dakota was up 18.3%, thanks to 28,000 more cows offsetting a 20 pound drop per cow. Texas was up 3.5% on 12,000 more cows and a 35 pound gain per cow. Vermont was down 1.8% on a 20 pound drop per cow and 1,000 fewer cows. Washington State was down 7.1% on a loss of 17,000 cows and 20 pounds less per cow than a year ago. 

Matt Gould blamed high feed costs, supply chain problems, and perhaps weather for the 1.6% drop and said it was “certainly bullish.” He added that the Russian invasion will have serious implications for agriculture. For one, feed costs are skyrocketing, which raises U.S. milk production costs.

Class III futures moved higher but backed off some. February was trading late Friday morning at $20.90; March, $21.96; with a peak of $22.35 in April.

Milk output globally is tighter than anyone expected and it isn’t any better ‘down under’ either, according to StoneX. Dairy Companies Association of New Zealand says January output was down 6.1% (down 6.1% on a milk-solids basis). StoneX expected it to be down 5.7%. The decline puts their season-to-date production down 3.8% so far.

“This marked six consecutive months of lower than forecasted production,” says StoneX. “Pasture growth index levels have been running below year-ago and 5-year averages for the last few months, but recently pasture levels surpassed the 5-year average as weather has begun to improve. With poor production through the first two thirds of the season we have moved our full season forecast down to a 3.8% decline but we see an easy path towards a 4% decline,” says StoneX.

Dairy cow culling in January was down from December and from a year ago, according to USDA’s latest Livestock Slaughter report. An estimated 260,800 head were sent to slaughter under federal inspection, down 7,000 from December and 16,500 head or 6.0% below Jan 2021. 

In the week ending Feb. 12, 70,000 dairy cows were sent to slaughter, up 7,100 from the previous week, and 3,500 head or 5.3% above a year ago.

Checking supplies, U.S. butter stocks grew in January but at a slower than normal rate and were well below those a year ago, according to the Agriculture Department’s latest Cold Storage report. The Feb.22 Daily Dairy Report says that both butter and cheese inventories grew by less than-typical margins in January.

The January 31 butter inventory stood at 221.3 million pounds, up 22.3 million pounds or 11.2% from December, reversing sixth months of declines from the previous month, but were down 110.6 million pounds or 33.3% below those in Jan. 2021, fourth consecutive month to fall short of a year ago.

American type cheese fell 4.1 million pounds or 0.5% from December’s level, which was revised down 3.4 million pounds, but was 29.7 million pounds or 3.7% above a year ago. 

The “other” cheese category grew to 583.2 million pounds, up 6.4 million or 1.1% from December, and 5.4 million pounds or 0.9% above a year ago.

The total cheese inventory inched up to 1.445 billion pounds, up 3.9 million pounds or 0.3% from December, setting a new all-time high for total stocks, and were 37.3 million pounds or 2.6% above a year ago.

Driven by bullish Milk Production and Cold Storage reports and perhaps the invasion, cash dairy prices in the President’s Day Holiday shortened week moved higher, then slipped back. The Cheddar blocks climbed to $2.0175 per pound Thursday but closed Friday at $1.9450, down 4.25 cents on the week, while 32.75 cents above a year ago.

The barrels got to $1.9550 Tuesday but finished at $1.90, down 3.50 cents on the week, 48 cents above a year ago, and 4.50 cents below the blocks. There were 4 sales of block reported on the week at the CME and 6 of barrel.

Reports of port congestion have been a broken record however the Feb. 18 Dairy and Food Market Analyst says, while things are improving, there remains “significant severe port problems in the West. While the number of ships waiting to unload has decreased to levels comparable with October, we are nowhere near pre-pandemic levels (with no delays). There is also a waiting line at every major port in the East.”

On a happier note; the DFMA also reported that “Foodservice sales in the U.S. are surging with the end of mask mandates. In the latest seven-day period, restaurant firm ‘OpenTable’ reported total restaurant traffic was up 1.4% versus pre-pandemic levels, which was the best weekly performance since September and a stark improvement from early January when restaurant traffic decreased by 30%.”

Speaking of the ports; the International Dairy Foods Association (IDFA), the Port of Los Angeles, and CMA CGM, a world shipping and logistics firm, stated in a joint press release that they are “working together to prioritize exports of U.S. dairy products and report significant progress moving cargo to Southeast Asia, South America, and other export destinations. 

In January, the groups formed the Dairy Exports Working Group to identify and address supply chain issues hampering U.S. dairy product exports. Ongoing discussions, planning, and problem-solving among the organizations have yielded breakthroughs that could lead to long-term solutions for U.S. dairy exports, including moving cargo from the interior of the U.S. to the West Coast,” the press release stated.

Dairy Market News reported that Midwest cheese plants continue to undergo operational updates and maintenance, which resulted in time away from cheese production. Plants are performing updates now because laborer shortages and higher production costs have yet to cease. Cheese inventories are balanced to available and customer interest is steady. Plant managers say orders are more analogous to pre-COVID years. Spot milk is remaining somewhat available, primarily due to plant maintenance downtime, according to DMN.

Western cheesemakers say that export demand is strong as loads are being sold at lower prices than those from other countries, with continued notable interest from Asian markets. Domestic cheese interest is “more muted,” says DMN, as retail demand is steady to lower. In some parts of the West warmer weather and loosening COVID restrictions have led to an uptick in food service demand. A shortage of truck drivers was causing delays, while port congestion is further delaying exports. Spot cheese inventories are unchanged. Cheese production is steady though some plants say labor shortages and delayed deliveries of production supplies continue to cause them to run below capacity.

Cash butter closed Friday at $2.5875 per pound, 10.25 cents lower on the week but still $1.1175 above a year ago, with 15 sales reported.

Butter demand remains a little softer, according to Central producers. Churning is ongoing at as brisk a pace as possible, due to laborer and driver shortages. Cream availability is steady or more available when compared to previous weeks. Cream demand was lighter into Class II production. Butter market tones of recent weeks have reflected the general tightness of supply, a strengthened export market, and bullish global butterfat values, says DMN.

Cream inventories are reportedly beginning to tighten in the West as demand for cream is steady. Some plants report cream inventories are short, as bad weather and a shortage of truck drivers caused delays. Western demand for butter is mixed. Loosening COVID restrictions in parts of the West are leading to higher food service demand though retail demand is softening. Domestic loads are currently being sold at a discount to other countries. Butter inventories are tight in the region. Butter makers are running busy schedules, though managers continue to cite labor shortages and delayed deliveries of production supplies as preventing them from running at or near capacity. 

Grade A nonfat dry milk climbed to $1.8750 Thursday but closed Friday at $1.86, up a penny on the week and 72.75 cents above a year ago, with 27 loads sold.

Dry whey closed Friday at 78 cents per pound, down 3 cents on the week, lowest since Jan. 14, but 22.25 cents above a year ago, with 4 sales reported on the week at the CME.

Dairy margins strengthened the first half of February as a sharp recovery in milk prices following the recent selloff more than offset an increase in projected feed costs, according to the latest Margin Watch (MW) from Chicago-based Commodity and Ingredient Hedging LLC.

“Class IV Milk prices have been particularly strong as a surge in butter prices is supporting the market,” the MW stated. “CME spot butter increased 17.75 cents Feb. 11, the largest single session price rise in the past 20 months and continued rallying to start the following week. Butter production ran below pre-pandemic levels for the second half of 2021, with churn activity suggesting a continued lag in output during January and February. This has caused butter stocks to drop and tightness in other global markets is aggravating the situation.”

“The latest Global Dairy Trade (GDT) auction recorded its third consecutive jump of 4% or more, with the index climbing 4.2% led by gains in whole milk powder, skim milk powder and butter. GDT skim milk prices are 34% higher than last year and up 67% from 5 years ago. April Class IV Milk futures above $25 per cwt. would be the highest monthly Class IV settlement ever if prices continue to hold.” 

“The Bureau of Labor statistics highlighted the domestic inflation situation reporting that food prices jumped by 7% in January with dairy products at retail costing 3.1% more than they did last year. USDA’s February WASDE report featured a smaller than expected cut to South American crop estimates though private forecasters expect much lower corn and soybean outlook for Brazil and Argentina than current USDA forecasts which continues to support feed markets,” the MW concluded.

Lastly, the DFMA says 2022 average farm-level cash breakeven margins have risen to $20.01 per cwt in its latest model update, which uses CME futures prices to estimate feed costs. This is up from the last estimate of around $19.30. “Over the last month, several milk producers called, from Wisconsin to California, and tell us their break evens are closer to $21.00,” the DFMA concluded. “Even still, with the latest milk checks in hand, farmers are in profitable territory.”

Lee Mielke is a graduate of Brown Institute in Minneapolis, MN. He’s formerly the voice of the radio show “DairyLine,” and his column appears in agricultural papers across the U.S. Contact him at lkmielke@juno.com.