Dairy Price Volatility Increases at Year’s End

Published on: 12:11PM Nov 28, 2011

The cheese market has pulled back from its recent highs but first lifts the average Class III price for the first 11 months of the year to $18.33, the highest average price ever for that period of time.

Cheese prices have soared higher since the end of October and were able to trade at and above $2.00 for just a brief period of time. The price rally ended mid-month and fell back by Thanksgiving near the levels they were a month ago.
This rally was a little suspect right from the beginning as cheese supply was sufficient for demand. Some varieties were a bit tighter but certainly not a cause for concern. However, holiday orders needed to be filled and increasing cheese prices brought more buyers out of the woodwork.
Holiday demand has been sufficient enough to allow for a decline in cheese stocks. Inventoried stocks needed to be dipped into to fill orders. The October “Cold Storage” report indicated a seasonal decline of cheese inventory. Total cheese stocks were 1.013 billion pounds, a decrease of 28.8 million pounds from September. This put stocks 35.4 million pounds below the close of 2010. However, this is little consolation given total cheese stocks remain at the highest level since 1984. American cheese inventory declined 19.9 million pounds to 614.7 million pounds, the first decline on a year-over-year basis since 2007.
The fact that cheese prices can be strong despite a large inventory is very positive. Consumer demand has grown over the years both domestically and internationally. Greater inventory is required to be on hand to meet demand and provide a cushion of stocks in case events would cause a significant decrease of milk production. The market needs to feel comfortable with the stocks-to-use ratio.
I had indicated that once buyer’s needs were satisfied there could be a void under the market. The market is in that void with no clear bottom yet being established. However, prices may fluctuate up and down somewhat through the end of the year. Sellers of cheese who waited for a top before unloading extra product have waited too long. They have been chasing the market lower.
The run-up of cheese prices was successful in assuring a better milk price for November. The Class III price should be announced around $19.10 with Class IV around $18.00. That would put the average Class III price for the first 11 months of the year at $18.33, the highest average price ever for that period of time. The average Class IV price for the first 11 months should be around $19.25.
Butter price has been struggling. Historically, butter has been the leader of cheese, and this certainly was the case again. Butter price began declining Nov. 3 after a brief price increase. Price fell 27 cents from the beginning of the month to Thanksgiving. It led the decline in cheese price by 11 days. Butter moved to the lowest price since December 2010.
Interestingly enough, butter stocks have turned from being significantly lower than the previous year to higher than a year earlier. Lower stocks early in the year kept butter price averaging higher than $2.00 for the first eight months of the year. Exports were good as well as domestic demand. However, high prices cure high prices with increased production. October butter stocks of 129.8 million pounds were 48.1 million pounds above where they were at the end of 2010. Domestic demand really has not slowed much, but export demand has declined drastically. September butter exports were down 52.2% from the previous month and down 38.5% from a year earlier.
Falling grain prices need to be protected. Now is the time to finish protecting all of your grain needs for 2012 with call options or call option spreads. For those who have initiated these option positions earlier, it is time to roll them down to a lower strike price. There is a lot of fund money waiting to be invested in commodities when traders feel more comfortable over the Euro Zone debt issues.
Fundamentals in the grain markets have not changed. Outside market influence has resulted in speculative money being taken out of the markets. Export sales have slowed because of the weakness in prices. Once a bottom seems to have been established, importers will again step back up to the plate. Get your feed prices protected. There is a lot of year ahead of us.
Upcoming reports:
-          Agricultural Prices report on Nov. 30
-          Dairy Products report on Dec. 1
-          November Federal Order class price on Dec. 2
-          Fonterra auction on Dec. 6
-          World Agricultural Supply and Demand report on Dec. 9
-          California Class I price on Dec. 9
-          Fluid milk sales on Dec. 9
-          Export sales report on Dec. 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 website 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 my not be suitable for everyone. Those acting on this information are responsible for their own actions.