What’s Been Driving Cheese Prices?

Published on: 12:34PM Dec 09, 2013

Good demand is a correct assessment, but it’s not the only reason.

It seems as if the market has caught the holiday sprit, and volatility is the result. Block cheese prices moved to the highest level since Nov. 8, 2012, giving the impression that current milk and cheese supplies are tighter than a year ago. If December Class III milk futures close at (or near) the current level, then 2013 will have the second highest yearly average in history. Along with this, we are ending the year with the best milk/feed ratio since October 2010.

This brings us to the question, "What caused the recent significant increase in cheese prices?" The first thing that comes to mind is that there is good demand, which is a correct assessment but not the only reason. Domestic demand is good with seasonal demand strong. Export demand has been exceptional compared to last year.

In the third quarter, U.S. butterfat exports were up 283% from a year ago, with nearly 16% of butter production shipped in the July-September period. Whole milk powder exports were up 235% in the third quarter. On a value basis, exports totaled $593 million in September, up 48% from the previous year. Year-to-date export values reached $4.92 billion, 26% ahead of last year. U.S. exports have accounted for 15.4% of the total milk produced in 2013. Whey protein exports have reached 47% of total production, with 45% of the total NDM/SMP produced being exported.

October exports of cheese and curd were slightly higher than the pace set in September, according to Foreign Agricultural Service (FAS). Cheese exports were up 41.4% over last year, with totals reaching 27,074 metric tons (mt). Cheese exports for the first 10 months of this year are 16.5% above the same period of time last year. Whey exports reached 44,028 mt, up 3.6%. Year-to-date exports are up 3.6% over last year. October exports of butter are up 145.3% over last year totaling 10,512 mt, according to FAS numbers. Exports are up 72.0% so far this year, compared to the same period last year. Nonfat dry milk exports increased 56.2% to 51,702 mt in October and up 18.5% for the year.

October’s "Cold Storage" report showed a decline in American cheese stocks of 31.8 million pounds, with stocks totaling 629.2 million pounds. Supply is still 3% above last year. Swiss cheese stocks declined 2.3 million pounds to 27.7 million pounds. This is down 8% from last year. Other cheese stocks declined 12.4 million pounds, totaling 367.3 million pounds, up 4% from last year. This put total cheese stocks at 1.024 billion pounds, down 47.0 million pounds, but still 3% higher than last year. October butter stocks declined substantially with inventory at 173.8 million pounds. This was down 59.2 million pounds from last month, but up 20% from last year.

Taking into account good domestic and international demand, one has to wonder why inventory remains above year-earlier levels. The current rate of decline is similar to last year, but inventory was at a higher level when the seasonal decline began. Much of the recent increase in cheese prices has been the result of immediate orders that needed to be filled as retail outlets frantically stocked shelves for year-end demand. Buyers had to come to the spot market to purchase cheese at whatever price they could get it. I have seen this happen in the past during this time of year.

A price void could be developing under this market and, once last-minute buying is complete, a swift price decline could unfold. If you have not already done so, now is the time to initiate a hedging strategy, using either a fence strategy consisting of purchasing puts and selling calls or just put options to protect current milk prices for either Class III or Class IV, depending on your location and utilization.

Upcoming reports:

- World Agricultural Supply and Demand report on December 10
- Global Dairy Trade auction on December 17
- January Federal Order Class I price on December 18
- November Monthly Milk Production report on December 19
- November Livestock Slaughter report on December 19
- November Cold Storage report on December 23

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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