Even though cheese prices are low, it is encouraging to see the increase that cheese prices have shown over the past few weeks. The market will continue to chop up and down, but the fact that a lot of cheese has come to the market over the past few weeks and buyers continue to purchase steadily, is a very positive sign.
Cheese prices are above support, which should make the February milk price the lowest of the year. This is certainly something to cheer about, but it does not help our present situation. The February Class III price is $9.31 and the lowest since March 2003. This is $1.47/cwt lower than January. The Class II price is $10.25, down 16 cents and the Class IV price is $9.43, down 16 cents.
There is one aspect of the steady buying of cheese that could turn out to be a detriment later in the year. Buyers see plenty of cheese available and coming to the market. They are not standing back waiting for it to bottom as they do many times, but feel that prices may not decrease much further. This is causing them to stand in and purchase cheese to build inventory and provide a cushion. The longer duration with prices remaining low, the more they may purchase and avoid having to chase the market later in the year.
If milk supply tightens and cheese supplies become tight, price could escalate as buyers will need to outbid each other to get what they want. If the buyers have a greater cushion of product already on hand, they will not have to aggressively bid the price higher to get it. This would limit a price rally later in the year. We have seen this a few times in the past when cheese prices just did not increase very much in the late summer and fall time periods.
Buyers are justified in their fear of higher cheese prices later in the year. The January Livestock Slaughter report showed a large increase in dairy cattle slaughter. There were 281,100 dairy cattle slaughtered, the most since January 1997. There were 52,200 more slaughtered than December and 45,400 more than a year ago. Some of the cows were removed as a result of the latest round of the CWT program. Others were removed as a result of low milk prices. It is a matter of survival. Expenses have to be cut and lower producing cows are moving out of the herds. If they are not paying their way, they are not being kept around.
This report is one of the keys to milk price potential. It is a barometer of the state of the industry on the farm level. It will take a few months of heavy culling to begin to tighten the nation's milk supply, so do not look for a quick turn in milk prices.
CWT is expected to implement another herd reduction round sometime this year. There have been a lot of numbers tossed around as to how many cows they would purchase. CWT is tight-lipped about it, and we will not know for sure until they announce it. Then we may not even know for sure until it is finalized. The last round resulted in them purchasing 10,000 less cows than they initially indicated. A large scale reduction from another buyout will certainly have a significant impact on milk supply.
My current recommendation is to purchase put options for closer months if Class III futures jump. The March and April contracts jumped earlier on the cheese price increase, but have since eroded lower than where they were when cheese was $1.07. Purchase May and June put options on another bounce. Later months will likely remain steady while waiting for continued price direction from the underlying cash market.
Upcoming reports to watch for are the Dairy Products report on March 4; the Annual Livestock Slaughter report on March 6; the California Class I price on March 10; Fluid milk sales report on March 13.
--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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