By Alyssa Sowerwine

MADISON, Wis. — Cheese prices at the Chicago Mercantile Exchange (CME) have hit 2010 highs in the past several weeks, but analysts say the longevity of these higher prices is questionable, as most attribute them to the high price of butter at the CME.

Last week, cash market butter prices at the CME broke the $2 barrier to settle at $2.04 per pound Aug. 20, an increase of 12 1/4 cents from the week ended Aug. 13.

Prices have continued to increase this week, settling at $2.1725 per pound on Thursday. (For today’s market prices, please see chart on page 2.)

“Cream supplies remain tight from coast to coast,” says USDA’s Dairy Market News. “Many butter producers continue to sell a portion of their cream to other uses vs. churning, and churning that continues to occur is often not keeping pace with demand.

“Thus, many producers and handlers are reaching into lighter-than-desired inventories to fulfill current orders,” Dairy Market News adds.

Butter stocks uncharacteristically increased slightly in July but remained at a five-year low, USDA notes in its latest Cold Storage report, adding that low holdings have contributed to the highest wholesale butter prices since 2004. (For more on the latest Cold Storage data, see related article in this issue.)

“As we got into this year, cream and butterfat became tight and demand picked up,” says Eric Meyer, a risk management consultant with FCStone/Downes-O’Neill. “We rarely see prices get this high and haven’t since 2004.”

Meanwhile, cheese prices last week closed at $1.6475 per pound for blocks and $1.6150 per pound for barrels, up from closing prices the week ended Aug. 13. This week prices continued to increase to $1.68 for blocks and $1.64 for barrels as of Thursday.

“I want to hope it’s because the economy is improving,” says Allison L. Specht, dairy and regulatory economist with the American Farm Bureau Federation. “Trends are showing economic growth in other parts of the world. We’ve got U.S. cheese prices in the low- to mid-$1.60s, yet cheese stocks are still high.

“I think butterfat is really supporting cheese prices right now,” she adds.

Meyer says while cheese prices are seasonally high, he also thinks the higher butter prices are a contributing factor.

“As we approach $1.70 (for cheese), we should run into some resistance,” he says. “I think (cheese and butter) are very closely tied this time around, but the cheese market is more susceptible to demand destruction.”

Meyer adds that he doesn’t foresee cheese prices remaining at levels this high for the duration of 2010.

Mike North, senior hedge consultant at First Capitol Ag, says he also thinks the higher cheese prices are temporary.

“The butter is carrying the cheese,” he says. “I think as we go forward, butter will reach a top and cheese will follow.”

North notes that while the butter market is strong, it’s due to lower supply and likely not a sign of overall economic improvement.

According to Meyer, while he feels the butter prices haven’t yet reached their “top,” the higher prices will begin to curb demand at the retail level.

“As prices are raised, people will pull back from buying butter,” he says. “We are reaching price levels that will translate into less promotion at the retail shelves and less demand at the foodservice and institutional levels.”

In addition, the quick, upward price movement in the butter market could cause long-term demand destruction and shut off the export market if and when global players undercut U.S. prices come fall, Meyer says.

“For now, this market is poised to run higher and will likely get choppy and volatile over the next few weeks as it looks for a top,” he says.

Meyer adds that in the midst of the cheese and butter price activity at the CME, nonfat dry milk (NDM) prices have remained steady to weaker in comparison.

NDM prices, which have remained mostly steady over the past two weeks, were at $1.2250 per pound for Extra Grade and $1.2000 per pound for Grade A as of Thursday.

According to Specht, the relative steadiness of the NDM prices “isn’t a bad place to be.

“If we’re volatile in a couple of markets, we need one that’s steady,” she says.

According to Dairy Market News, declining availability of manufacturing milk continues to cut into the production of many dry dairy products.

NDM production is well below most plant capacities, and spot market activity is lower, Dairy Market News notes.

According to Meyer, the NDM market has been driven by the global markets more than cheese and butter.

“Exports and usage in the U.S. have been on and off,” Meyer says, adding that NDM prices are poised to remain steady, and even have a weaker tone, throughout the remainder of 2010.

“I don’t see a sharp draw-down, but I also don’t see prices really going up,” he says.

• International outlook

This week, Dairy Market News reports that European dairy prices are trending slightly lower, with some of the weakness attributed to the weak euro vs. the U.S. dollar.

Sales typically are slow during the summer holiday season, Dairy Market News notes, adding, however, that “buyer interest is starting to develop as the summer holiday season ends and buyers look for fall/winter needs.”

In addition, Dairy Market News notes that the 2010-11 production season is getting under way in New Zealand and Australia, and farmers there are “optimistic” for a strong start to the year.

Meanwhile, NZX Group, which operates the securities and energy markets in New Zealand, will be launching a Global Whole Milk Powder (WMP) Futures contract Oct. 8.

NZX says it also plans to launch a supporting suite of futures and options products throughout 2010 and 2011.

“Demand for NZX Global WMP Futures has been very strong, particularly from offshore, and we have timed this launch to ensure all participants are ready to support trading from day one,” says Mark Weldon, CEO, NZX.

The NZX contract will be cash settled, Weldon says, adding that NZX dairy futures will be traded on the NZX electronic platform, GlobalVision, and centrally cleared through the new clearing house operated by New Zealand Clearing Limited.

Meyer notes that those interested in trading this contract will be able to do so through FCStone as well.

CMN

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By Rena Archwamety

MADISON, Wis. — For cheese and dairy business owners looking to start a company, introduce new products or expand their sales, obtaining the right loan can be crucial to future success. In addition to banks, businesses may find state and federal programs can help provide the extra financial support needed to launch their projects.

A new low-interest revolving loan program for Wisconsin dairy businesses was announced last Friday at Holland’s Family Cheese, Thorp, Wis., during part of Wisconsin Gov. Jim Doyle’s “Up North” tour. The program’s funds are focused on helping businesses purchase and installation of equipment that will service a new market or product line.

The new loan program, managed by Wisconsin’s Department of Agriculture, Trade and Consumer Protection (WDATCP), has a $150,000 cap and range of terms, and it is open to dairy businesses with a net worth of less than $3 million that are interested in expanding, introducing new products or entering new markets. It replaces a loan program that had a cap of $35,000.

The new program includes three types of loans:

• 50-40-10, with a 2-percent interest rate, where the program funds 40 percent of a project up to $150,000, the client partners with a bank for 50 percent and the business puts up 10 percent;

• 70-30, with a 3-percent interest rate, where the program funds 70 percent of the project up to $60,000 and the business provides 30 percent; and

• 85-15, with a 4-percent interest rate, where the program funds 85 percent of the project up to $35,000 and the business provides 15 percent.

Carl Rainey, a financial analyst and consultant for value-added business with WDATCP, says the program is designed to incentivize businesses to partner with local banks through the 50-40-10 program.

“We’ve seen quite a bit of reduction in lending recently due to the federal requirement to keep cash on hand, and banks reduced the capital they have to lend out,” Rainey says. “This program should fulfill part of that need that exists.”

Rainey adds that bringing the bank partnership requirement into this program also is beneficial to businesses in the long term.

“As they’re growing, they will have additional capital needs,” Rainey says. “If they already have a good relationship established, they will have good capital coming their way.”

Grady Hedgespeth, director of the U.S. Small Business Administration’s (SBA) Office of Financial Assistance, also advises small businesses to seek out local banks, especially in the current tight economic environment.

While larger banks can be helpful, too, Hedgespeth says businesses should not be surprised if they have to go to several large banks before they approve financing.

“(Small banks) are probably going to be more receptive than larger players,” Hedgespeth says. “In general, local lenders tend to know markets better than other (larger) ones.”

• Vermont ag loans

In addition to Wisconsin, other states have programs and agencies designed specifically for providing financial assistance to agricultural businesses.

The Vermont Agricultural Credit Corporation (VACC), a unit of the Vermont Economic Development Authority (VEDA), is not a state agency, but it is a nonprofit lender governed by Vermont state statutes. VACC offers loans to both farmers and agricultural facilities for purchasing land or equipment for producing, processing and distributing agricultural products, including cheese.

“Part of our mission is to encourage diversification, processing and production of Vermont products,” says Sarah Isham, senior agricultural loan officer, VACC. “We have had some beginning farmers who started up cheesemaking at the same time. We’ve seen real growth in cheesemaking across the state.”

VACC typically finances start-up companies, though it also can help with expansions. The lending limit per borrower is $1.112 million, adjusted annually. VACC makes both real estate and operating loans, does a few revolving lines of credit and can help refinance debt.

One featured project on the VEDA website, www.veda.org, is Dancing Cow Farmstead Cheese Inc., Bridport, Vt., which started in 2006. Using milk from the organic dairy herd on Stephen and Karen Getz’s farm, Karen Getz and Jeanne Finnerty started the cheese business with the help of a $50,000 operating line of credit provided by VACC. VACC also financed a $196,000 farm ownership loan to the Getzes to refinance a real estate debt on their 243-acre farm, which now includes a cheesemaking facility and cheese cave utilized by Dancing Cow.

• Federal programs

Cheese and dairy businesses from any state also can take advantage of federal loan and guarantee programs.

SBA offers loans including its 7(a) guaranteed loan program that provides up to $2 million for any purpose required for a small business. SBA’s “Patriot Express” also allows 7(a) borrowers who are veteran, active duty, reservist and national guard members and spouses to easily have a lender review and evaluate a loan of up to $500,000.

Another popular SBA loan is the 504 certified development company loan that is designed to create long-term, fixed-rate financing at favorable rates for plant or equipment purchases. This loan allows for up to $2 million, or $4 million for manufacturing. A recently-added provision to the 504 loan allows a business to refinance part of an existing debt to use toward an expansion or similar part of a property that it is building.

For cheesemakers, SBA loans are limited to companies with up to 500 employees.

Hedgespeth says SBA loans often provide better terms and more flexibility than businesses can get through conventional lenders.

“Often that means longer maturity periods. You don’t get a 20-year fixed rate on commercial financing, especially in this environment, so it’s great for small businesses,” Hedgespeth says.

He adds that SBA also has the ability to meet the borrower where they are financially as opposed to where typical standards require them to be.

“If a business can demonstrate that it has a really solid cash flow, even if it does not have a lot of collateral, a loan can be done by SBA,” he says.

Another federal program through USDA Rural Development provides credit enhancement, or a guarantee on loans obtained from commercial lenders that mitigates a portion of the bank’s risk.

This program offers an 80-percent guarantee on loans of $5 million or less; a 70-percent guarantee on loans of more than $5 million and less than $10 million; and a 60-percent guarantee on loans of $10 million-$25 million.

The biggest advantage of the guarantee program usually is longer-term financing, according to Jeff Hudson, acting business and community programs director, USDA Rural Development, who also is the primary contact for the business and industry guaranteed loan program in Wisconsin. Another advantage is that the bank will be involved in the loan for the entire term, he says.

“They have the ability to walk out if it’s in default, but with a federal guarantee, (banks) are much more patient with customers instead of pushing right into a foreclosure situation,” Hudson says.

Hudson says the use of this program has had back-to-back record years in Wisconsin, partially due to economic conditions that are driving the use of these programs.

“With the crisis over the last two years, banks are looking for these credit enhancements to improve conditions,” Hudson says. “They are grasping the importance of these guarantee programs to the businesses they are working with.”

Stan Gruszynski, Wisconsin state director for USDA Rural Development, says this guaranteed loan program can allow cheese businesses to continue to expand and drive Wisconsin’s economic future.

“The sustainability of our rural communities and agricultural heritage is directly linked to cheese production and a diversified agricultural economy,” Gruszynski says. “The Rural Development Business and Industry Guaranteed Loan Program affords small businesses an opportunity to grow and expand by sharing the risk of the underwriting process.”

• Advice to borrowers

While loans and guarantees can provide the financial tools to help a dairy business succeed, having a strong business plan and sense of the marketplace are equally important to success, according to business consultants.

“The most important thing you need to come prepared with is an awareness of the marketplace,” Rainey says, adding that often clients already will have a product developed in their mind before evaluating if there is a marketplace demand for these products. “Where does an opportunity in the marketplace exist? What business can I build around that opportunity?”

Isham says VACC recommends for cheesemakers a business plan that would include where they plan to do the processing and aging, who their market is and whether they plan to distribute themselves or go through someone else. She also says businesses should be very realistic in sales projections, budgeting in some amount of loss at least for the first year as cheese quality and aging may not yet have reached market standards.

Hedgespeth recommends a number of resources through SBA, nonprofit small business counselors from SCORE, and local small business development centers that can give advice not only on loans but also areas like marketing and expense control. He says SBA recently has seen a real increase in the number of existing businesses using these resources.

“In a tight economy, when you’re busy running a company, it’s not bad to get free advice on what to do to tighten the belt a bit,” Hedgespeth says.

Rainey says the most underutilized resource he sees are people in organizations such as university extension programs or Wisconsin’s Dairy Business Innovation Center. He says businesses often see capital as their major need, not realizing that they also need to combine this with people and expertise.

“Seek these (resources) first, then use loans,” Rainey says. “Strategically use money where it is the most effective.”

CMN

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COLUMBIA, Mo. — A mid-year update of the 2010 U.S. agricultural baseline shows modest recovery in dairy prices paid to farmers, according to information recently released by the University of Missouri Food and Agricultural Policy Research Institute (FAPRI).

According to Scott Gerlt, crop analyst with FAPRI, the baseline revision comes following the release of new USDA data.

For dairy, milk prices have not increased as much as FAPRI projected earlier this year, notes Scott Brown, FAPRI livestock economist. (See “2010 FAPRI Outlook report projects ag industry recovery” in the March 12, 2010, issue of Cheese Market News.)

“A reason for slower price recovery is that cow numbers continue to build,” Brown says. “We have not seen a cutback in milk supply.”

The report notes, however, that prices for meat and dairy products have recovered to a level that allows for most livestock and dairy producers to cover production costs, and some sectors now are profitable.

The mid-year baseline report anticipates an all-milk price of $16.05 per hundredweight this year, down from $18.45 in 2008 but up from $12.93 in 2009. The all-milk price will increase slightly to $16.56 per hundredweight in 2011 and then to $18.26 in 2015, the report says.

According to the report, milk production is projected to reach 191.4 billion pounds this year. Production will increase slightly to 194.0 billion pounds in 2011 and continue steady increases to levels of 199.2 billion pounds in 2015, the report says.

Cow numbers dropped from 9.2 million head in 2009 to a projected 9.1 million head in 2010, notes the report, which shows a projected drop over the next few years with 8.9 million cows anticipated in 2015.

The baseline anticipates American cheese production will increase from a projected 4.19 billion pounds this year to 4.27 billion pounds in 2011 and 4.45 billion pounds in 2015.

Other cheese production will rise from a projected 6.13 billion pounds this year to 6.25 billion pounds in 2011 and 6.49 billion pounds in 2015, according to the report.

The report notes nonfat dry milk production is projected to reach 1.65 billion pounds in 2010, increasing slightly to 1.70 billion pounds in 2013 before falling to 1.69 billion pounds in 2014 and 2015.

Butter production is expected to reach 1.55 billion pounds this year, increasing to 1.57 billion pounds by 2013 but dropping back to 1.55 billion pounds in 2015.

The report anticipates increases in wholesale prices for cheese and butter each year through 2015.

The price for cheese at the Chicago Mercantile Exchange (CME) in 2011 is anticipated to reach $1.56 in 2011 but increase to $1.70 per pound by 2015, according to the report.

The report notes butter prices at the CME, which have passed $2 per pound in the past week, are anticipated at levels of $1.76 in 2011 and $1.95 in 2015.

Brown notes that the next full FAPRI baseline process will begin in November. A preliminary baseline will be prepared and reviewed at a workshop in December. Reviewer comments and other new information will be incorporated in the final baseline, which will be prepared in January 2011.

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WASHINGTON — Total natural cheese in cold storage was 1.05 billion pounds at the end of July 2010, up 2 percent from June 2010’s 1.03 billion pounds and up 5 percent from the 1.0 billion pounds in cold storage at the end of July 2009, according to data recently released by USDA’s National Agricultural Statistics Service (NASS).

Total American cheese in cold storage was 638.6 million pounds July 31, 2010, up 2 percent from June 2010’s 627.0 million pounds and up 6 percent from July 2009’s 605.02 million pounds.

NASS reports Swiss cheese in cold storage at the end of July totaled 28.04 million pounds, up 4 percent from June 2010’s 27.0 million pounds, and up 20 percent from the 23.3 million pounds in cold storage at the end of July 2009.

Other natural cheese in cold storage totaled 382.1 million pounds in July 2010, up 3 percent from both June 2010’s 371.3 million pounds and July 2009’s 371.9 million pounds.

Meanwhile, NASS reports total U.S. butter in cold storage as of July 31, 2010, was 199.6 million pounds. This is up 1 percent from June 2010’s 197.6 million pounds but down 24 percent from the 262.8 million pounds in cold storage at the end of July 2009.

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