Will Cheese Inventory Reach a New Record?

Published on: 18:58PM Feb 29, 2016

Milk prices look ugly for this year unless an unusual event takes place that would either tighten milk supply and/or significantly increase consumer demand. We must remember that this is not only confined to the U.S., but must be viewed on a world wide basis. A substantial tightening of milk supply in Europe would lift world daily prices on the Global Dairy Trade auction allowing the U.S. to take advantage of the potential of increasing exports thereby increasing milk and product prices. It is a global market and we need to recognize that.


The U.S. dairy industry has enjoyed good domestic demand. However, this demand has not been able to absorb the entire decline of exports that we have experienced over the past year or more. Milk prices have suffered because of it. Milk prices in 2015 were substantially lower than 2014 and 2016 futures and projected milk prices are lower than 2015. This certainly does not make one excited about price prospects for the coming year.


There has been a lot of focus on butter exports and the substantial slowdown of those exports. This has been q subject of discussion due to the magnitude of the decline. Butter exports in 2015 were down 70.0% compared to the previous year. Yet despite this decline, butter price has been able to push to a record high in September and has been able to remain above $2.00 per pound since August 11, 2015. However, that has changed since last week when butter price slipped below $2.00. Strong butter production and reduced exports may continue to put pressure in price. The latest cold storage report for January showed a substantial increase of butter inventory which is seasonal, but certainly not what we need to keep price supported. Even though January butter stocks increased 41.0 million pounds or 26% from December, this was not out of line with the usual from this time of year. The five-year average increase of inventory is 46.6 million pounds. So this, in itself, is not bearish and neither is the fact that inventory is at the highest level since 2013. The bearish aspect of the market is the potential for inventory to increase substantially over the next few months.


The greatest focus and attention needs to be directed towards cheese inventory. Cheese prices are lower than butter price, but yet have been able to hold. Exports have not declined as much with 2015 exports down 14%. Not bad considering low world price. January inventory did show the largest increase of total cheese inventory over the past five years with a gain of 32.3 million pounds. The real concern here is that exports may remain slow for a period of time which could push inventory to record highs if the current pattern remains in place. Current cheese inventory is at the highest level for the month of January since 1984 and is 56.0 million pounds below the record high inventory in September 1983. This appears to be of greater concern than butter, but does not seem to be as much of a concern in the market as maybe it should be. How long will the market be able to absorb and maintain these levels of inventory without greater impact on the market? This indicates the industry seems to be more comfortable with higher inventory. This year is critical as to how prices will react to slower exports and growing inventory. We can only hope demand remains strong enough to absorb supply and production is reduced worldwide in order to allow prices to move to higher and then remain profitable.


Upcoming reports:


-January Agricultural Prices report on February 29

-February Federal Order class prices on March 2

-January Dairy Products report on March 3

-World Agricultural Supply and Demand report on March 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 www.agdairy.com.


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