High Cheese Prices Are a Gift to be Savored

Published on: 17:22PM Nov 11, 2011

Exports have supported higher cheese prices for much of the year. What bears watching now are holiday order fulfillments, year-end demand, struggling butter prices, world cheese prices and the LGM-Dairy Program.

It has been an exciting couple of weeks in the cheese market. The price for both blocks and barrels jumped significantly as buyers became more aggressive. This was a bit of a surprise given the price choppiness seen for some time. However, it stands to reason that this could happen as holiday orders need to be filled. Buyers will show up at the spot market to purchase supply to fill these orders and when sellers are reluctant, their only recourse is to bid price up in order to shake some loose.
Class III milk futures contracts in 2012 increased, but have not responded as much as November and December have. Traders are cautious now that prices have reached above the $1.90 area. Time of year suggests rallies may be short-lived. Once holiday orders are filled, prices could decline seasonally.
Cheese exports have been doing well and are largely responsible for strong prices this year. USDA released the September report last week, which indicated strong cheese exports continue to take place. There were 34.3 million pounds of cheese and curd exported during the month. This is up 21.0% from September 2010. In fact, it is the highest September export of cheese in history. It was virtually unchanged from August despite September having one less day for doing business. Exports have supported higher cheese prices for much of the year. Not only from regular exports, but also exports that have been a result of CWT export assistance. Year-to-date export assistance has been granted for 81.0 million lb. of cheese.
Butter exports have been struggling since June. Monthly shipments have been below the previous year for three straight months. Exports began the year posting strong gains over the previous year. However, they have since tailed off with the September report showing exports of 6.0 million lb., down 38.5% from a year earlier. This is likely why butter price has been declining recently. Buyers are not concerned over a shortage through the end of the year and have pulled back from the market. This certainly bears watching as, historically, the butter price leads the cheese market in either direction. If this holds true, cheese prices may not remain at current prices for very long.
Another concern over the cheese price strength is the disparity of U.S. price to the level cheese price traded on the latest Fonterra auction. The average winning price for cheddar was $1.55. The recent average European Union cheddar price is 2.06 per lb. FOB price at main port with an Oceania price of 1.91 per lb.  The indication here is that sustainable upside price potential may be difficult to realize unless world prices begin to show more strength.
My hedge recommendation is to purchase put options for December and January contracts. Current cheese prices may be difficult to maintain through the end of the year and a return to $1.70 or lower is not out of the question once end of the year demand is met. A December $18.00 put can be purchased for around 30 cents with a January $16.50 put at 40 cents. Continue to establish fence positions for January through May. Purchase put options close to the level futures are trading and sell call options $1.50-$2.00 higher up to 50 percent of production.  
Those who intend to use LGM-Dairy as a price protection strategy may have difficulty implementing the desired coverage. There has been huge interest in this program, which resulted in nearly all of the first appropriation of subsidy money being used up during the first half hour the program was available in October. Many who wanted it could not get it due to the crash of the system.
USDA’s Risk Management Agency (RMA) has now appropriated another $7 million to the remaining $816,000 from the October offering. It is probable that this will also be used up very quickly, potentially still leaving some without coverage. This is a good program, but some may still not be able to obtain coverage unless RMA appropriates more money. Be ready to use other marketing tools available to you to protect price for both feed and milk for the coming year.
Upcoming reports:
-          Fonterra auction on Nov. 15
-          October Milk Production report on Nov. 18
-          December Federal Order Class I price on Nov. 18
-          October Cold Storage report on Nov. 22
-          Commercial disappearance report on Nov. 22
-          October Livestock Slaughter report on Nov. 23
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.