Cheese Price Retreats From $1.50 -- Again

Published on: 17:45PM May 27, 2010

By Robin Schmahl, AgDairy Market


With the first five months of 2010 behind us, significantly higher milk prices still remain elusive. Early this year, there was no shortage of talk about how high milk prices were going to go. Much of the discussion revolved around milk prices achieving a level somewhere between $18/cwt. and $20/cwt. That stands to reason since recent history has shown a significant rebound in milk price after a year of low price.


There are a lot of other factors, however, involved in milk price than just seasonality. In fact, seasonality in the dairy market is a thing of the past. Recent years have shown the highest milk prices during spring flush or early summer rather than in the fall as usual. Cheese and butter buyers have changed the way they do business and are willing to pay storage for a longer duration rather than trying to outbid each other during the peak demand period in the fall season. After all, in the fall, bottlers are clamoring for fluid milk to meet school demand as well as cheese and butter buyers purchasing for increased orders.


There was a time early this year when it seemed as if the milk price was going to move substantially higher. Cheese price moved up to $1.51½, and the butter price moved steadily higher. The dry whey price slowly increased at the same time, pushing the January Class III price to $14.50/cwt. and Class IV to $13.85/cwt. 


The industry focused on the monthly Fonterra Auction as a barometer of international demand and price. Economists touted an improving domestic and world economy, stating that the worst was behind us. Yes, there were positive reports indicating a turn in the economy and that consumers were feeling better about their current situation. There were also, however, as many reports indicting a prolonged recovery was in process.


Increasing meat demand and lower cattle numbers have pushed the beef price significantly higher. Cull cow prices were, and still are, prompting heavier culling from the nation’s dairy herds. Despite this and a long period of low milk prices, dairy farmers rose to take advantage of an improved milk price outlook by increasing per-cow production dramatically. The goal was to make up for lost income over the past year. The last few monthly milk production reports certainly have shown this to be the case as milk production increased over the previous year.


April’s milk production report showed the highest year-over-year production increase since December 2008. The combination of CWT’s herd retirement program as well as heavy culling decreased milk production in 2009 and early 2010. This tide has turned once again, with year-over-year production steadily increasing. Western states had shown the largest production decline, but the pendulum is swinging. California, the No. 1 milk producing state, showed production up 100,000 lb. from April 2009. This is the first increase for the state in 17 months.


Increasing production is not all that bad as long as demand continues to increase. Demand and world prices have been strong for whole milk powder and skim milk powder (SMP), with weekly regional nonfat dry milk prices, futures prices and Fonterra auction prices increasing. However, recently the nonfat dry milk futures have weakened and regional prices have reached a plateau. The next Fonterra auction on June 1 will be watched for any signs of weakness. Cheese prices on the CME Group spot market have yet to surpass the price resistance level of $1.51½. Buyers begin to back off near that price level and are again stepping back.


Butter has been a well-supported market with good export demand. Price has fallen partially, however, as the result of the debt crisis potential in Europe and the fact that Europe announced it will release SMP and butter intervention stocks to the market.


All in all, milk prices have been locked in somewhat of a range, and current indications are that this may continue for awhile. Class III futures bear this out as contract prices from September 2010 through September 2011 show very little price difference, averaging $14.67/cwt. A Class III futures price of $15.00/cwt. or higher in any of the 2010 contracts is the area where options and fence hedging strategies need to be implemented. August through December contracts have reached and exceeded this price three times since early March and subsequently retreated. Another decrease in cheese prices from the $1.50 area may make this a difficult level to reach again.


Upcoming reports:


-          Fonterra auction on June 1

-          Dairy Products report on June 2

-          May Federal Order class prices on June 4

-          World Agricultural Supply and Demand report on June 10

-          California Class I price on June 10

-          Fluid milk sales on June 11



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


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