Buyers Comfortable with Milk Availability for Now

Published on: 12:07PM Dec 10, 2012

Cheese and butter prices plummet as buyers show very little desire to replenish inventory before the end of the year.

What many thought was not going to happen in the foreseeable future happened over the past few weeks. Cheese and butter prices plummeted to price levels not seen since late July and early August.

What makes it surprising is that these prices were on the rise as the nation’s drought was unfolding, and grain prices were rising due to declining crop conditions. Higher grain prices increased culling. Heavy culling is ongoing as feed prices remain high and profitability virtually non-existent. Cow numbers have fallen below year-earlier levels, dropping milk production below year-ago levels. So why have cheese and butter prices fallen as low as they have?

Despite high feed prices and heavy culling, milk production remains strong, with the October milk production report showing milk output down only 0.1% for the nation.

Along with this, butterfat and protein content of the milk being produced is being termed as “outstanding” for this time of year. This improves cheese yield, thereby making more available to the market at a time when holiday orders have been filled. Buyers of cheese and butter purchased extra supply earlier, anticipating the amount of fill-in orders and regular demand that will need to be taken care of.

This leaves buyers comfortable with their supply -- no need to aggressively purchase. There is very little desire to purchase product to replenish inventory before the end of the year. Buyers see the weakness in the market and will not step up to purchase unless a bottom is established. The industry intends to keep supply close to demand. Extra product is put out as quickly as possible to avoid a supply buildup.

Cheese production in October was surprisingly strong. American cheese output reached 370.6 million pounds, up 5.1% for September and the highest monthly output since March. Total cheese production was 927.9 million pounds, up 3.2% and also the highest output since March. Cheese production during the rest of this month will be strong as milk is diverted from bottling when schools are closed.

There is already some difficulty in finding a home for the extra spot loads of milk that are available. There are reports from the Midwest that some milk is being priced as much as $2.50 below class in order to entice manufacturers to take the extra milk that is and will be available. Fluid handlers are actively making arrangement with manufacturers for the milk that will need to be diverted. It will be an interesting few weeks. There is plenty of plant capacity but unwillingness to fill that capacity in the near-term.

The good news is that the dry whey price continues to increase. The most recent AMS price reached 65.70 cents, the highest price since the week of Feb. 4 and nearing the high set on Jan. 21 of 71.13 cents. The last time the whey price was in this range, demand began to slow as alternatives were sought. There is some indication stocks are slowly increasing as buyers are purchasing hand-to-mouth through the end of the year. Contracts are being finalized for much of 2013. Traders feel prices will weaken as the calendar moves into 2013. Dry whey futures indicate prices may decline to 53 cents by late summer and fall. Still a good price, but a decline of 13 cents would mean a decrease of 78 cents per cwt. on the milk check.

Feed prices need to be protected. The recent decline is providing the opportunity for price protection. China has recently been purchasing corn but in smaller quantities than needs to be reported on a daily basis. It appears they will continue to do this. They seem to be “flying under the radar,” so to speak. Large quantity purchasing always gets greater attention by the media and spurs price rallies.

My recommendation is to purchase call option spreads for expected feed needs through mid-year. Purchase an at-the-money call and sell a call option against it 70-80 cents higher for 25 cents or less. The current drought monitor map does not look much better than it did last summer. We certainly will see another volatile year.

Upcoming reports:

- World Agricultural Supply and Demand report on Dec. 11
- Dairy Export report on Dec. 11
- Livestock, Dairy, and Poultry Outlook report on Dec. 17
- Global Dairy Traded auction on Dec. 18
- November Milk Production report on Dec. 19
- January Federal Order Class I price on Dec. 19
- November Livestock Slaughter report on Dec. 21
- November Cold Storage report on Dec. 21

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

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.