The slowing economy impacts demand

August 3, 2008 07:00 PM
 
Robin Schmahl

The dairy markets continue to set new records and this past week was no exception.

The barrel cheese price fell apart on Wednesday, July 30, falling a record 28 cents in one trading period. Price fell from $1.93 to $1.65 as barrels continued to be offered to the market. At the same time, a record wide block/barrel spread of 32 cents was established due to blocks not declining as much. 

Of course this wide spread was not expected to last very long, and snapped back to normal the following day. However, the movement over the week did change the outlook for milk prices and was reflected in Class III futures, which fell dramatically in the 2008 contracts. Class III contracts in 2009 have not been immune to the change in perception and price outlook. Futures in 2009 fell steadily as the longer-term outlook and price expectations changed. The 12-month average for 2009 at the close of last week was $18.65, down dramatically change from the 12-month high of $20.58 achieved on June 18.

The question most asked is, "Why is the price declining at a time when demand should be increasing?” It is the time of year when schools will be opening soon, increasing fluid milk demand. Milk has ceased coming out of the Southeast and now beginning to move into the area to meet the bottling demand.

Typically, this is the time when buyers will step up to purchase cheese to have on hand for holiday and end of the year demand. However, demand has slowed and is causing cheese to back up into the pipeline, resulting in more cheese being available to buyers. The current level of cheese production is such that manufacturers are not willing to hold on to cheese in hopes that price will come back soon. They need to continue moving it to the market or risk having stocks build to larger than desired. Cheese has been moving slower in the country which is the reason more has been showing up at the CME cash market. It needs to find a buyer and that is an outlet that sellers have available to them.  

Commercial disappearance of dairy products over the first five months of this year shows an increase of 3.1% over the same time a year ago. However, this is deceiving because the breakdown of products show the increase is coming from butter (up 21.1%) and nonfat milk (up 21.9%). American cheese disappearance was down 0.3 %; other cheese was down 0.7%; and fluid milk products were 0.7% lower. This is still not all bad, even though disappearance of cheese was running 2-3% higher for quite some time.

The real evidence of slowing cheese demand is shown in the three-month period from March through May. American cheese disappearance declined 2.5% while other cheese disappearance was 3.0% lower than the same period a year ago. This shows the effect of the slowing economy is beginning to have a greater effect on demand. It is unclear as to how long the current economic slowdown may last, but as one lender put it, "We expect it to get worse before it gets better.”

So what does this mean for milk prices? Consumers have been switching from brand name cheese to store brand and off-brand cheese in order to save money. There has also been some switching of brands or types of milk for the same reason.

When disposable income tightens, adjustments need to and will be made. This has been seen with demand for dry whey. Manufacturers of food and feed products have found alternatives that are less expensive as their profit margins have tightened. This is why dry whey price remains in the 25 cents per pound area. The price of dry whey has a direct impact on milk price and it appears that no price help will come from that commodity for some time. So, cheese prices and milk price is adjusting to levels where demand will remain strong enough to keep supply from overwhelming the market.

Upcoming reports to watch for are the Fluid Milk Sales report on August 8; the California Class I prices on August 8; the World Agricultural Supply and Demand report on August 12; and the July Monthly Milk Production report on August 18.


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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