Over the past two weeks cheese prices have moved very little. Blocks gained a half cent while barrels lost a penny. Trading has been active since the beginning of the year with a significant amount of blocks and barrels exchanged. However, as time moves forward, the price swings have become less and prices are weaker than they were a month or two ago.
It appears as if cheese buyers have purchased their fill of product for now and have no need to become aggressive. Bids remain under the market with no one going after cheese. This has resulted in current prices at or slightly above support.
The idea of low milk prices tightening the market quickly as producers cull heavily has not yet translated over into higher milk prices. Culling has been high, but not high enough to bring the supply back in line with demand. The March milk production report showed lower milk production than a year earlier with the 50-state production decreasing 0.3 percent. This is the first time there has been negative production over the previous year since June 2004. So, the low milk prices are having an effect.
The announcement of the seventh round of a CWT herd reduction did not garner any cheese buying interest nor any futures buying interest. Traders have been conditioned to wait and see what the impact will be before they will take a market position of any size. No one knows how many cows they will eliminate. Bids are being accepted through May 1 with farm audits to begin on May 27. It is reported that interest has been high for this round, but the lowest bids will be accepted until the committee thinks they have enough.
Personally, I do not think they will use all of their money as well as borrowed money in this round, but I do think they will accept a large amount of cows. The anticipation has been that they might eliminate 300,000 cows, but it may only end up to be half of that. They will accept what they believe will have a desired affect on the market, allowing them not to have to use up all of their money. However, if the effect of taking these cows out does not change milk price very much, a follow-up program will likely be initiated again before the year is up.
Nonfat dry milk has been getting much of the attention in the industry over the past few weeks. Regional prices have been slowly increasing as demand strengthens. Buyers, sensing the low may have been established, were willing to step up and purchases product for inventory. The spot cash market trade came alive last week with 16 loads of Grade A nonfat traded. This was a surprise, and it indicates a real change in the powder market. I could not find anytime in history when this volume of trading was done on the cash market during a week. However, an interesting twist is that powder continues to be purchased by the CCC under the price support program. There were 7,576,397 pounds purchased last week. Since the marketing year began on October 1, the CCC has purchased 225.8 million pounds of powder; 111.2 million pounds were purchased since the first of the year. Even though this market is coming to life it will not have a direct impact on the Class III milk price as it has no bearing on the price calculation. Indirectly it will support milk price because any demand increase in a milk product will result in more milk moving to that area of manufacturing.
I am currently recommending to stand aside of the market at this time. Wait for another Class III futures price rally and then be ready to step in and establish fence positions. The previous rally provided the opportunity to hedge milk production and be ready to extend coverage when another rally takes place. Prices may not increase as much as the past two times as traders are becoming accustomed to limited price rallies with limited upside potential. They will not be so willing to buy the market on a cheese price increase.
Upcoming reports to watch for are the April Agricultural Price report on April 30; the march Dairy Products report on May 4; the California Class I price on May 8; and the World Agricultural Supply and Demand report on May 12.
--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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