Cheese and Butter Supply Dims Price Outlook

Published on: 12:17PM Jun 24, 2013

The magnitude of those stocks is the bigger issue dampening the outlook for significantly higher prices this year. Has demand slowed?

Two major reports for the dairy industry were released this past week and neither of them suggest milk prices will trend higher anytime soon.

Historically, milk prices trend higher into September or October before slipping back. During the first five months of this year, the Federal Order Class III milk price has fluctuated $1.59, with the high in May at $18.52. Current futures price for June indicates a Class III price of $18.04, which is very close to the price in January. Current futures contracts indicate a seasonal price curve with a price over $18.80 for September and October. Futures contracts generally carry this premium each year and then adjust accordingly as market factors influence price movement.

Dairy farmers continue to rise to new challenges and produce milk even under adverse conditions. Drought last year in many parts of the nation slowed milk production to some extent in those areas. However, production remained strong across the nation, resulting in record milk production. High feed prices and feed shortages in some areas created other difficulties, yet production remains strong with USDA projecting another record year. The latest milk production report for the month of May showed an increase nationwide of 0.8% over last year. February and March showed slightly lower milk production, but the industry is back on track to outpace last year.

The bigger issue dampening the outlook for significantly higher prices this year is the magnitude of increasing cheese and butter stocks. Growth in milk production has been slower than the pace set last year, but inventory growth of dairy products has been exceptional. During the first five months of this year, American cheese stocks increased 162.0 million pounds more than the same period of time last year, with stocks reaching the greatest level since September 1986. Total cheese inventory has exceeded last year’s pace for the first five months by 251.5 million pounds. Butter stocks have grown by a whopping 233.8 million pounds more for the first five months compared to last year, taking it back to a level last seen in late 1993.

Interestingly, CWT has continued to aid in the exports of butter and cheese to the tune of 60.812 million pounds of cheese and 51.727 million pounds of butter so far. Of course, some of these exports are still considered part of these stocks as assisted exports may not be completely shipped until as far out as October. What this indicates is demand has slowed. Milk production through May has not been much higher than last year, but inventory has increased substantially.

Cheese and curd exports have been running above last year indicating much of the slowing of demand is domestic. Buyers have been purchasing regularly on the chance that supplies could tighten later in the year, but with the current pace of inventory growth, it does not appear this concern will become a reality.

My recommendation is to extend price protection through October with the use of option spreads consisting of purchasing at-the-money puts; selling puts $1.25 below and selling call options $1.25-$1.50 higher for about 20 cents. This strategy has worked well the past few months and should continue to work well in the current market environment.

Upcoming reports:

- Agricultural Price report on June 27
- USDA Planted Acreage report on June 28
- Quarterly Grain Stocks report on June 28
- GDT auction on July 2
- Dairy Products report on July 3
- Export sales report on July 3
- June Federal order Class prices on July 3
- California Class I price on July 10

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

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