Demand Improving but Inventory is Large

Published on: 16:05PM Sep 25, 2009

By Robin Schmahl

A recent increase in cheese prices has been a welcomed sight for dairy producers. The question is whether there will be enough buyer interest, stemming from increasing demand, to continue to push prices higher. We know that something has got to give soon as milk prices cannot remain at these low levels without a significant shake-out of farmers. Right now, most are determined to stay in business until either milk prices improve or they are broke and forced out of business.

The USDA’s “Monthly Cold Storage” report for August indicated that it may be difficult to see milk prices increase very much through the end of the year. Inventory of American cheese totaled 621.5 million pounds, a decrease of 6.9 million pounds from the previous month, but 53.8 million pounds higher than a year ago. Stocks are at the highest level they have been since 1986. Historically, August inventory would decline significantly from July, but this decline was the smallest since1992. Total cheese inventory declined 2.7 million pounds from the previous month to the level of 985.3 million pounds, leaving stocks at the highest level since 1984.

Butter stocks surprised the trade by increasing 391,000 pounds in August to 263.2 million pounds, compared to the previous year. This increase solidifies the outlook for limited price potential to the upside. The last time August butter stocks increased was in 1990. This shows slower demand has had a large impact on supply. Demand is showing some signs of improvement with orders increasing for the end of the year demand. Manufacturing has been able to keep up with demand with limited dipping into inventory to fill orders. The pendulum should swing on this from now through the end of the year.

The USDA has indicated the desire to continue to use the increased cheese and nonfat dry milk support prices that were implemented on a temporary basis for August through October. However, this will require the allocation of additional funds. This is currently under consideration as well as the possibility of raising support prices even higher if the funding is made available. This will cause market uncertainty and volatility in the months ahead. I am not sure whether more government intervention will help or hinder the industry in the long-term. We all would like to see milk prices increase soon, but a band-aid approach may not be the best approach.

Many other countries around the world are also struggling with low milk prices and are searching for ways to improve prices. Again, short of dumping milk or manufactured product on a pile to rot, these products will be absorbed by consumers at some point in time.

The idea of the government purchasing dairy products is to take them off the market now in order to improve prices. Once prices improve from increased demand or less production these stocks will then be filtered back out to the marketplace. This will limit upside price potential for a longer period of time until supply and demand come back in balance, but will hopefully improve prices in the time being. It has been a tough year for dairy farmers.

Upcoming report to watch for are the September Agricultural Price report on September 29; the California 4a/4b prices on October 1; the September federal order class prices on October 2; the August Dairy Products report on October 2; the World Agricultural Supply and Demand report on October 9; and the California Class I price on October 9.

--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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