The first Global Dairy Trade auction of 2019 saw its weighted average of products offered jump 2.8 percent following the 1.7 percent rise on Dec. 18 and 2.2 percent on Dec. 4. Sellers brought 63.2 million pounds to market, down from 79.8 million in the Dec. 18 session and the lowest amount since July 17, 2018.

All products offered were in the black, led by buttermilk powder, up 9.3 percent, followed by skim milk powder, up 7.9 percent, which follows a 3.4 percent rise last time. Anhydrous milkfat and butter were both up 3.9 percent following a 4 and 4.9 percent respective gain in the Dec. 18 event. Cheddar was up 3.2 percent after a 2.2 percent gain. Lactose was up 1.6 percent and rennet casein was up 1.3 percent. Whole milk powder brought up the bottom, up 1.2 percent after it inched up 0.3 percent last time.

FCStone equates the GDT 80 percent butterfat butter price to $1.8037 per pound U.S., up 6.6 cents from the last session. CME butter closed Jan. 4 at $2.25. GDT Cheddar cheese equated to $1.5289 per pound, up 4.9 cents from the last event and compares to the Jan. 4 CME block Cheddar at $1.4175. GDT skim milk powder averaged 99.82 cents per pound, up from 92.63 cents last time. Whole milk powder averaged $1.2269, up from $1.2129. CME Grade A nonfat dry milk closed Jan. 4 at 97.5 cents per pound.

Matt Gould, editor and analyst with the Dairy and Food Market Analyst newsletter, said in the Dairy Radio Now broadcast that the GDT lends some optimism, even though the dairy industry and others still face the “trade war” left over from 2018. He stated that, while there have been some concessions from China, the retaliatory tariffs from Mexico are still in place.

China lowered tariffs on infant formula and whey products, which is good for global demand, he said, plus trade in general is growing, indicative of that are the shrinking inventories of milk powder in every place where data is available. “Demand appears to be getting better,” Gould said, and both he and the people he talks to are more optimistic than they have been.

Switching to domestic demand, I ask about one of dairy’s biggest customers: restaurants. Gould said “2018 was a challenging year economically due to a tight job market which meant higher wages and more turnover of employees so their bottom lines got pinched.”

He adds that sales volumes were fairly weak and very weak for the big chains, so as they look to 2019, “there’s talk of recession and the tight job market remains, which means their costs are high so at least at the restaurant level things look a bit challenging going forward.”

Pizza chains were also challenged in 2018, according to Gould, primarily from other convenient fast foods, plus “they face a more competitive 2019 after having really booming years in 2015, 2016 and 2017.” In summary, Gould said the domestic situation is “mediocre.”

Back on the farm, “dairy margins were flat over the second half of December with limited movement in the milk and feed markets to close out 2018,” according to the latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC. The MW stated that “while nearby margins continue to reflect losses through first quarter, deferred margins are holding up better, with both second and third quarter at or near the 70th percentile of the previous 10 years and fourth quarter just beneath that level.

“The forward curve continues to reflect optimism over improving fundamentals for milk supply and demand, with deferred futures holding a $3-per-hundredweight premium over spot prices based on the September Class III contract. Thawing U.S-China trade relations are behind some of that optimism as a recent phone conversation between President Trump and Premier Xi reported that tangible progress is being made on some of the more sensitive issues that have blocked previous rounds of talks as negotiating teams prepare for new meetings ... in Beijing.

“Excess cheese production continues to weigh on nearby futures, as cheese output through October exceeded 2017’s record-breaking volume by 2.5 percent while U.S. milk production is only up 1 percent from 2017. This preference for directing milk production towards cheese is also being reflected in monthly Cold Storage inventories, as USDA reported November butter stocks at a three-year low of 153.7 million pounds vs. November cheese inventories of 1.35 billion pounds. which were up 7.5 percent from a year ago. While the October-to-November draw of cheese inventories was larger than average, overall cheese inventories remain abundant, which will put additional emphasis on demand improvement in 2019,” the MW concluded.

The markets will have less to digest in terms of USDA reports due to the partial government shutdown, so rumors and speculation will play a bigger role. The November Dairy Products report, scheduled for Jan. 3, was the next casualty, following the loss of the Ag Prices report on Dec. 27.

With the start of another new year, I remind readers of some points on milk pricing. In most of the U.S., California now included, milk prices are determined using complex formulas by the U.S. agriculture department, but the system has evolved over the years from a simple volume/butterfat basis to the current multiple component pricing, which takes into consideration volume, butterfat, protein and various other components of the milk, as well as where the milk is to be used.

There are four Classes of milk: Class I is fluid in the bottle or jug and yields the highest rate of return to farmers. Class II is milk used in ice cream, yogurt and cream cheese. Class III is milk that goes to cheese and dry whey, and Class IV is milk used in butter, nonfat and whole milk powder.

It takes 9.6 pounds of milk to produce a pound of cheese, so every penny movement in the cheese price equates to about 10 cents on the Class III milk price.

Dry whey is a byproduct from making cheese. One-hundred pounds of milk will yield about 10 pounds of cheese and 6 pounds of dry whey. A 1-cent movement in the dry whey price equals about 5.9 cents on the Class III milk price.

The Class IV milk price is driven by powder and butter. One-hundred pounds of milk yields about 8.6 pounds of nonfat dry milk and 4.2 pounds of butter. A penny movement on the nonfat dry milk price means about 8.6 cents on the Class IV price and a penny movement on butter results in a 4.2-cent impact on the Class IV price.

Dairy farmers receive a uniform or blend price, which is determined by their region of the country, based upon how much of that farmer’s milk went into the four different classes in his or her milk market order. That is a simplified “Cliff Notes” perspective. Call your cooperative for complete details.

The International Dairy Foods Association has consolidated the governance of its constituent organizations, as of Jan. 1. The Milk Industry Foundation, the National Cheese Institute and the International Ice Cream Association are now under one central organization, IDFA.