While the USDA’s WASDE reports tend to make ripples in the grain markets, the dairy sector is usually not drastically affected and that’s no different this month. While USDA reports the cow herd has declined leading to less production, keep in mind it’s only been reduced by 0.05%, a fairly insignificant number according Kyle Schrad, a dairy markets analyst and risk management consultant with FCStone LLC.
Schrad says farmers shouldn’t pay as much attention to the reduced production estimate as the price adjustments reflected in the reports.
“Typically the WASDE reports don’t do much for dairy markets,” he says. “This time they are basically revamping prices, for the most part slightly lower, and I think that’s in line with what the market expected.”
Another slight reduction for cheese and butter prices for 2016 is due to the anticipation the U.S. might not export as much cheese and butter next year as hoped.
“Largely uncompetitive prices are likely to limit growth in export sales of butter and to a lesser extent, cheese in 2016, and fat-based exports are reduced,” USDA officials included in the report.
Our inability to export large amounts of fat-based products shouldn’t come as a shock according to Schrad.
“Currently our prices are still carrying a premium versus the international market place which means we aren’t going to export much cheese,” he says.
Supplies continue to grow in the U.S. also adding to the reduced price according to USDA. As milk production shifts from California to the upper Midwest Schrad says cheese production will continue to grow because there happen to be a lot of cheese plants in the area. He doesn’t except the price to improve drastically any time soon.
“As long as we aren’t exporting much cheese and we’re making more of it we can expect the price to be lower,” he says.
USDA’s report also notes the current high domestic demand for butter will help carry a strong price through the end of 2015 but supplies do not support a good price into 2016. Schrad says the butter market does this each year around the holidays as we experience a seasonal increase in demand causing tight supply.
“When there’s a tightness in the market place, that allows for prices to move pretty high with very few trades,” he says. “Once we get through the holiday demand period I would expect that we see a very sharp pull back.”
USDA’s report also noted the increase in the 2015 all milk price to $17.00 to $17.10. The increase is likely a result of the recent rally in Class IV price but Schrad admits it’s “a bit surprising to see them raise it this late in the game.”