Cheese Prices Reach Year-ago Levels but Not Profitability

Published on: 12:14PM Sep 28, 2012

Meanwhile, milk supply meets demand, but little remains for spot purchases -- a situation that won’t disappear anytime soon.

After nearly six weeks of cheese trading in the price range of $1.82-$1.90, prices were finally able to break out to the upside. The block price quickly moved to and through $2.00, reaching $2.0825, the highest price since Aug. 10, 2011, before posting a decline.

Even though the October and November futures indicate Class III prices near $21.00, it is little consolation during a time when profitability is non-existent in many cases. (This certainly is after the fact for those who have been forced out of the business of producing milk.)

Current excitement of higher cheese, butter and milk futures prices is magnified by the fact that grain prices have been trending lower. This improved the milk/feed ratio marginally. The ratio for September was 1.46, up from 1.36 in August. Despite the 10-cent increase in the soybean price to $16.30 per bu. and the increase in the alfalfa hay price by $2.00 to $205.00 per ton, corn declined 28 cents to $7.35 per bu. The All-Milk price jumped $1.00 to $19.10, resulting in the improvement to the milk/feed ratio.

Farms that have been able to receive the benefit of the Milk Income Loss Contract (MILC) payments have been in a significantly better position. Over $1.00 per cwt. has been added to income for each of the past five months, with the largest payment made in July at $1.7441.

These payments are about to come to an end. Since Sept. 1, the calculation of the MILC payment has reverted back to what it had been. Payment calculations will decline to 34% from the previous 45%. The feed adjuster will move up to $9.50 per cwt. of the National Average Dairy Feed Ration, up from $7.35 per cwt. Eligible production will revert back to 2.4 million pounds from the previous 2.985 million pounds. The MILC payment for August is $1.2943. If the current calculation was in place during August, there would not have been an MILC payment.

If Congress agrees on a new farm bill there will be no MILC payment, as there is no provision for it. If Congress agrees on a 3-month extension of the current farm bill, calculations for the MILC that have been in place since Sept. 1 will be in effect, potentially minimizing or eliminating any further payments.

The dry whey price has been slowly and steadily increasing. The current weekly AMS price is $0.5930 per pound, the highest level since April 7. There is some indication prices may be at or near a plateau. Supply is sufficient, with resellers offering loads to supplement manufacturer supplies.

Seasonal growth in milk production is taking place but not at the usual pace. Increased production per cow is being offset by heavy culling. Milk supply is sufficient for demand, but little is left over for spot purchases. This situation is not going to go away anytime soon. Feed prices have been trending lower but will remain historically high the rest of this marketing year. Limited feed supply and high feed prices will keep the nation’s dairy herd from expanding and thus limit overall milk output.

We have no further recommendations to hedge milk at this time. Hedges that are in place through the end of the year should be held. Previously sold put options should be held to expiration to improve hedge prices. Feed prices need to be watched closely, with call options rolled down before harvesting is complete. Continue to hedge feed prices utilizing options or option spreads to allow for the ability to capture lower prices if they develop.

Upcoming reports:

- Global Dairy Trade auction on Oct. 2
- August Dairy Product Production on Oct. 3
- World Agricultural Supply and Demand report on Oct. 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

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.