Few predicted prices would climb this high, but the drivers have been there for months.
Milk production has slowly regained the losses experienced during to the recent extremely cold weather. Cows, and milk production, have faced a lot of challenges throughout the past 12 months. Not only has there been an impact from unusually hot weather early this fall, which had a large impact on milk production, but lower quality corn silage in many areas has added another challenge.
Most producers indicate this impacted production for a while, but proper ration balancing has overcome the forage quality issue. However, this has not been without additional cost. Milk production has had a difficult time increasing seasonally, resulting in continued premiums paid for the purchase of extra milk. This has had an impact on butter and cheese prices. The block cheese price has now moved to levels last seen in August 2011 and is nearing the record high of $2.28 1/2 set back in May 2008. No one predicted cheese prices moving to current levels. The combination of heavier culling last year of cows as well as heifers, strong dairy exports, strong domestic demand, and poor feed quality has provided significant support to the market.
Recent higher milk prices and lower feed costs have increased the desire to limit culling and fill empty stalls in barns. It may take a while to build milk production back to trend line growth, but this will happen as time moves forward. USDA estimates milk production to increase 2.1% this year, reaching a record 205.6 billion pounds. One has to wonder if that will be enough to meet demand as the international demand for dairy products grows. U.S. dairy product prices have been competitive with world prices until recently as cheddar cheese is now pricing itself out of the world market. However, growing world demand will need to be filled as long as there are those willing to pay for it.
High cheese prices have caused some manufacturers to slow production in order to keep output closely aligned with demand. There is little desire to increase production and build inventory due to the potential for cheese prices to decline. They do not want to be holding high-priced product. This has resulted in some plants selling milk to limit production. However, this desire to limit production and manage inventory may keep overall inventory of cheese from growing seasonally. This could support the market for a longer duration than usual. Bear in mind that price support may not mean $20.00 milk but at potentially higher prices than one would expect. Current Class III milk futures already have a discount factored in.
One cannot be complacent in the current market. Class III futures set a record high $21.67 in August 2011. Block cheese price ranged from $1.79-$2.15 that month. High dry whey price provided substantial support to the pricing formula. The September 2011 Class III price fell $2.60 cents with another $1.04 drop the following month. I am not suggesting the same thing will happen again, but it certainly is a sobering thought and one to be mindful of.
CME Group is making changes to the current nonfat dry milk spot call contract. Effective Jan. 27, 2014, Extra Grade nonfat dry milk spot trading will be discontinued. Only Grade A nonfat dry milk will be traded. A change in payment for purchased nonfat dry milk product will be made requiring payment to be made within 3 business days after the date of invoice rather than making payment by wire transfer on the fourth day after the date of sale.
- Global Dairy Trade auction on January 21
- December Cold Storage report on January 22
- December Milk Production report on January 23
- Federal Order Class I advanced price on January 23
- January Agricultural Price report on January 31
- Cattle Inventory report on January 31
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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