Markets May Retrace Seasonally

Published on: 11:36AM Dec 07, 2009

By Robin Schmahl

Cheese price has moved to the highest price it has been in a year. It has exceeded the level anticipated for the end of 2009. There have been only two main buyers in the block cheese market and their aggressiveness had sellers holding their supply with confidence waiting for higher prices. Some would argue that supply was tight and cheese was not available. However, most bids that surfaced in the spot market were filled indicating cheese was available when the price was right.

The October Dairy Products report released on Friday by the USDA indicated cheese production was higher than a year ago. American type cheese production was 1.2 percent higher, Italian cheese production was 3.6 percent higher, and total cheese was 1.3 percent above a year earlier. Cheese prices have made an impressive rally since mid-July moving from $1.09 to $1.72. This has resulted in a $4.12 increase in the Class III federal order milk price as of Friday with the announcement of the November price at $14.08. Current Class III futures suggest another increase for December.

Lest we get to confident that prices will continue to increase, we need to realize that the market is driven by supply and demand. This is the time of the year with the greatest demand and also the time when markets can become precarious. Seasonally, prices decline into the end of the year as holiday demand become satisfied and inventories again start to build. This is beginning to be seen as barrel cheese and butter prices have been weakening. 

Barrel weakness over the past two weeks widened the block/barrel spread to 26 cents, and the second widest spread in history. Generally, the industry is comfortable when this spread at 3-4 cents. However, this spread has been exceptionally wide for nearly three weeks and is not coming together. Current market fundamentals demand that prices be where they are, and no effort is being made to move price just to bring the spread back to normal. It would not be out of the question to see block cheese price decrease through the end of the year following the lead of barrels and butter. This certainly does not mean prices will again fall apart, but a retracement in price would be seasonal and a normal market movement. I do not expect prices to fall very far.

World dairy prices have been steadily increasing, but are now giving some signs of slowing or stabilizing. USDA’s Dairy Market News publication reported that the latest global/Dairy Trade event for whole milk powder, held on December 1, showed an average price increase of 3.6 percent with an average price of $3,560 per metric ton. The second trading event had anhydrous milk fat averaging $4,349 per metric ton, a decrease of 8.6 percent.

All in all, dairy prices are well-supported and price declines will be limited. We do face a first quarter in 2010 that will be interesting. Stocks of cheese may end the year at the highest level in over 20 years. This in itself may not be an issue. However, it could eliminate some of the buying in the spot market that would normally take place as buyers rebuild aging programs and inventory. More will be on hand than usual. Lower cheese production should balance this out, but it could result in a choppy market early next year.

I recommend the purchase of put options to establish a floor in January and February Class III contracts. Near or at-the-money puts can be purchased for 40-50 cents. March through June protection can be done by using a fence position consisting of purchasing a put option near the current market price and selling a call option for a net cost of 40-50 cents. This will allow upside price potential to $16.50-$17.00 depending on the positions and premium cost. Do not do this on all of your production, but limit it to 50 percent or under.

Upcoming reports to watch for are the World Agricultural Supply and Demand report on December 10; the California Class I price on December 10; the Livestock, Dairy, and Poultry report on December on December 17; The November Milk Production report on December 18; the January Class I price on December 18; and the November Cold Storage report on December 22.

--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

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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