Increased Production Spells Trouble for Dairy Prices
Feb 06, 2012
Milk checks will be smaller in the coming months as cheese and butter prices decline. While traders anticipate lower prices, it’s up to demand to keep this from happening.
Cash cheese and butter prices do not yet appear to have established a bottom. Cash trade has been able to remain steady for a day or two, giving traders hope that the trend may be changing. The downtrend resumes, however, dashing any bullish hopes.
The recent decline of nearly $1.00 in closer-month Class III futures is now being met with the cries of, “Prices just cannot go down any further,” and “Prices just have to come back.” Most of us certainly would like to think these cries will be met as our livelihoods are at stake. But, the market is not a respecter of persons and it does not care about profitability or longevity. It is affected by supply and demand. High prices cure high prices and low prices cure low prices.
Current supplies of cheese and butter are growing and readily available to the market. Seasonally, stocks increase during the first half of the year as demand is generally slower, resulting in product moving into storage. So, growing stocks are not a surprise or bearish in themselves. The bearishness of the present situation is that buyers are holding back from purchasing cheese and butter for inventory.
Currently, there is no concern of shortage or tight supply. It is a buyer’s market. If prices were to find a bottom and begin to trend higher, it would bring buyers back into the market more aggressively. The intent would be to purchase what they could at the lowest price possible. That is when buyers begin to compete, resulting in increased prices.
Cooperatives Working Together (CWT) recently agreed to provide export assistance for 10.955 million pounds of butter for delivery from now through June 2012. Growing stocks as a result of increased butter production prompted CWT to assist in butter exports. This is the first butter export assistance since October 2010. The hope is that butter price will be supported through the increased sales overseas aided by CWT.
USDA’s latest “Dairy Products” report indicated increased cheese and butter production for December. Production of American cheese increased 1.2% to 371.0 million pounds over December 2010. Italian cheese production increased 3.5% to 409.0 million pounds. This put total cheese production at 929.0 million pounds, 2.4% above a year earlier. Butter production jumped 5.2% to 166.0 million pounds. Steadily increasing production at this time of year is going to increase inventory. Exports have been strong for more than a year and are a large reason why record milk prices were experienced in 2010.
Even though record milk prices were achieved in 2011, profitability was not great. High feed prices kept the milk/feed ratio confined to a low range of 1.73-2.14, which is certainly nothing to be excited about. This year is starting off with a milk/feed ratio of 1.77, according to the latest USDA “Agricultural Prices” report. This is the lowest monthly ratio since May 2011.
Milk checks will be smaller in the coming months, according to current futures prices. March and April Class III futures indicate prices could be below $16.00, a level not seen since January 2011. At the time of this writing, only the September contract is holding above $17.00. Class IV futures have been following butter lower. Dry whey futures are anticipating a decline in price as the year progresses. Futures contracts have fallen nearly 15 cents per pound over the past month, even though weekly NASS whey prices continue to increase. Traders anticipate lower prices will be coming. It is up to demand to keep this from happening.
- World Agricultural Supply and Demand report on Feb. 9
- Export statistics on Feb. 10
- Fluid milk sales on Feb. 10
- Fonterra auction on Feb. 15
- March Federal Order Class I price on Feb. 17
- January milk production report on Feb. 17
- President’s Day holiday on Feb. 20 – Markets will be closed
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 his website at www.agdairy.com.
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.