Butter and cheese prices dip below government support levels

by Ron Sterk
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KANSAS CITY — Prices for butter and cheese at the Chicago Mercantile Exchange have been trading near U.S. Department of Agriculture support levels in early January, while government held stocks of nonfat dry milk continued to grow at a rapid pace.

The first sales of butter since 2003 were made to the Commodity Credit Corp. of the U.S.D.A. price support program in the first week of January and continued last week. C.C.C.-owned stocks of bulk butter as of Jan. 15 totaled 375,658 lbs. In its Jan. 12 World Agricultural Supply and Demand Estimates report (WASDE), the U.S.D.A. projected the C.C.C. purchases of butter would total 5 million lbs this year.

Sales of butter to the C.C.C. have occurred even though prices for butter traded at the C.M.E. have remained slightly above the support level of $1.05 a lb. C.M.E. butter prices have held around $1.11 a lb in recent trading, about 10% below year-ago values.

Butter production has been seasonally strong and exceeded demand in recent weeks, according to the U.S.D.A. Butter stocks at C.M.E.-approved warehouses totaled 55.7 million lbs as of Jan. 10, up 11.2 million lbs from a week earlier, and the largest weekly increase since January 2007.

Cheddar cheese prices dipped below C.C.C. support prices of $1.10 a lb for barrels, hitting a low of $1.03, and $1.13 a lb for blocks, trading to a low of $1.04, in the first week of January. While both barrels and blocks have since come off their lows, both still were trading below support prices last week, with barrels closing at $1.06¾ a lb and blocks at $1.05½ a lb on Jan. 15. Cheddar barrel prices were $1.86 a lb a year ago.

Although no cheese sales to the government had yet been recorded as of last week, traders expect such sales soon and the U.S.D.A. projected 20 million lbs would be purchased by the C.C.C. in 2009.

"The trade is discussing whether cheese will be offered to the price support program or not," the Agricultural Marketing Service of the U.S.D.A. said. "Traditionally, prices need to be several cents below support to facilitate the extra costs associated with moving product to the C.C.C. compared to commercial." Extra packaging and grading is required, and cheddar cheese needs to be older than current stocks, the agency said.

The A.M.S. noted that cheese sales were sluggish over the holiday period, resulting in larger inventories, and that production has remained strong. The A.M.S. also noted some renewed buying interest at current prices.

Sales of nonfat dry milk (N.D.M.) to the C.C.C., meanwhile, have soared since Oct. 1, 2008. As of Jan. 15, sales of non-fortified nonfat dry milk to the C.C.C. at the 80c-a-lb support level had climbed to 133,031,708 lbs.

The U.S.D.A. last week projected 320 million lbs of nonfat dry milk would move to the C.C.C. in 2009, more than double its December projection of 150 million lbs and compared with 115 million lbs in 2008 (all since Oct. 1). No nonfat dry milk was sold to the C.C.C. in 2007 and 64 million lbs was sold in 2006.

Cash prices for low- and medium-heat nonfat dry milk have been near 80c a lb since the end of October 2008, and currently are about 45% below year-ago values. The U.S.D.A. forecast prices would average between 84@90c a lb in 2009, compared with $1.22½ in 2008 and nearly $1.71 in 2007.

All sales of butter and nonfat dry milk to the C.C.C. have occurred in the West region of the United States, where milk supplies appear to be most burdensome.

Disposal of growing C.C.C. stocks of nonfat dry milk have been problematic. The 2008 farm bill requires C.C.C. stocks be sold at 110% of the purchase price, or 88c a lb in the case of N.D.M., to prevent additional pressure on prices. The U.S. District Court in Chicago has set Jan. 22 to hear a complaint from the National Milk Producers Federation that seeks to block the U.S.D.A. from auctioning N.D.M. through The Seam, a private marketing service, at prices below the required level. An auction planned for the first week of January was postponed.

The situation with butter, cheese and N.D.M. is symbolic of several other dairy products, which are suffering from heavy production and slumping demand.

"In the face of weakening demand, domestically and especially internationally, milk and dairy product prices will continue to glide downward throughout much of 2009," the U.S.D.A. said.

This article can also be found in the digital edition of Dairy Business News, January 20, 2009, starting on Page 14. Click here to search that archive.

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