Dairy Perceptions Provide Volatility and Opportunity

Published on: 12:28PM Jul 08, 2013

Good news/bad news: While milk prices may slip nearly $1 per cwt. lower in July, cheese and butter prices have rebounded.

Since early April, milk futures have been in nearly a steady downtrend. Declining cheese and butter prices required futures to follow and, in most cases, eliminated some of the extra price premium futures contracts contained.

Despite the seemly daily price declines, the milk/feed ratio remained surprisingly stable. The ratio for April through June was 1.54, 1.53, and 1.53, respectively. For the same months, the All-Milk prices were: $19.50, $19.70, and $19.70, resulting in a fluctuation of the income-over-feed cost by just 2 cents.

July looks to provide a greater shock as milk prices may be nearly $1.00 per cwt. lower than they were in June. The good news is that cheese and butter prices seem to have established support, from which prices rebounded as buyers stepped back in more aggressively.

Intense heat and drought in Western and Southwestern states may be one reason for greater cheese-buying interest as concern mounts over decreases in milk production in those regions. As always, market participants react before the actual impact is seen, at which time prices will adjust accordingly.

This pattern was experienced in the market not too long ago as the drought in New Zealand and Australia dominated the news wires. Traders were concerned over supply shortages as the year would progress. Global Dairy Trade auction weighted-average prices posted double-digit gains for three consecutive sessions, sending buyers scrambling for product. That frenzy ran its course as cows were dried off for the season and rains began to fall in those areas.

The latest report is that both New Zealand and Australia are expected to begin the season with milk production flat to slightly higher than last year. Cows are in good body condition overall and moisture has improved pasture conditions immensely. Some areas have an over-abundance of moisture, but this is not a great concern at the present time.

U.S. cheese and butter weakened without the support of world prices, with cheese prices moving to the lowest levels since the beginning of the year while butter prices fell back to year-ago price levels.

According to USDA’s recent "Dairy Products" report, upside price potential for cheese, butter and milk may be limited. Production of American cheese during May increased 5.9% from a year ago. Italian type cheese production increased 2.7%, with total cheese production up 3.9%, reaching 953.9 million pounds. This is the highest amount of cheese produced for the month of May since 1982. Butter production also improved 1.5% over last year.

Demand will need to improve substantially in order to reduce stocks to a level that would provide concern over a tightening supply. Now that we are over half way through the year, this does not seem likely. Yes, milk production in the West, Southwest and Southeast are declining seasonally and as a result of hot weather. Other regions indicate strong milk output.

Components are declining, reducing cheese yield. Some compensation is being made by the addition of nonfat dry milk. The year-over-year comparison is where the rubber meets the road. This can be likened to the present grain markets. There was significant concern over late planting, and some acres that have not been planted at all. However, crop conditions are good on the planted acres and current estimates point to a large corn crop, increasing stocks substantially. So, some parts of the country are making up for the loss in other areas. We must not market according to the back-door mentality of making decisions for price protection based on our farm or our area.

Upcoming reports:

- World Agricultural Supply and Demand report on July 11
- Global Dairy Trade auction on July 16
- Livestock, Dairy, and Poultry report on July 17
- June Milk Production report on July 19
- June Cold Storage report on July 22

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