Robin Schmahl points out how--and why--cheese and butter have defied the correlation to world prices. Will those prices align again?
Volatility is alive and well in both daily spot trading at the CME Group as well as futures contracts. The week after Memorial Day showed substantial price swings, with some futures contracts nearly limit up one day and then limit down the next. Underlying cash is the driver of the market, with traders reacting to daily spot price movement rather than trying to anticipate long-term market direction.
There is a strong feeling that milk prices will remain supported the rest of the year. Demand has been--and is--strong, with inventory of various products not growing as much as anticipated. A real concern has developed for butter, with the latest cold storage report showing stocks 44% lower than last year. This is one of the main reasons why butter price moved to $2.30 at the end of May, 6.50 cents below the record high set in 2004. Demand needs to slow allowing stocks to build to a more comfortable level. The way to slow demand is to increase price. This has had an impact with some reports indicating slowing of export interest as well as domestic demand.
It is interesting to see how cheese, and more importantly butter has, in essence, defied the correlation to world prices. The past eight consecutive Global Dairy Trade (GDT) auctions have shown a decrease of the trade-weighted average price. However, U.S. prices seem to be affected very little by the price weakness. One could conclude that what happens on GDT auctions does not have much, if any, influence on domestic prices.
That currently appears to be the case. U.S. cheese and butter prices historically have run below world prices in order to remain competitive. However, since late last year they have been running higher than GDT prices. Export demand has been strong for our products with April exports of cheese up 32.1% and butter exports up 105.2% above a year ago. Increasing world demand has had buyers scouring the globe looking for dairy products to meet that demand. So the assessment needs to be made whether GDT auction price are a barometer of world prices, but yet have little impact on our high-quality dairy products or if a historical comparison is still in order.
One need not look too far to see how world demand impacts prices. Export sales and shipments of grain have a profound impact on prices. Traders watch and evaluate these reports weekly to get an idea price strength or weakness and competitiveness in the world market. I do not think dairy is much different. The difference is that we are dealing with a more perishable food source.
I want to look at the comparison of butter and cheese. Butter price on the Feb. 14 GDT auction was $2.15/lb. The latest auction price was $1.65. Also on Feb. 14, cheese price was $2.24/lb., while now it is at $1.92. Cheese price is significantly closer to world price but still running above, which is historically unusual. However, there is a large aberration between U.S. butter price and world butter price. This has been holding longer than I had expected, but will eventually correct.
I believe it will be only a matter of time before world prices and U.S. prices realign themselves again. My hope is that world prices will improve, leaving U.S. prices stable. However, it seems that the desire is to slow demand and build stocks for greater cushion through the end of the year.
- World Agricultural Supply and Demand report on June 11
- May Milk Production report on June 18
- Federal Order Class I price on June 18
- May Livestock Slaughter report of June 19
- May Cold Storage report on June 23
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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