Will High Cheese Prices Be Maintained?

Published on: 12:45PM Oct 26, 2012

Schmahl looks at the impact of recent prices on exports, the reality of feed costs and the outlook for U.S. milk production.

Much to the dismay of dairy farmers, cash prices have had difficulty maintaining upward momentum. In fact, it appears cheese and butter prices may have established a top for the rest of this year. The higher prices reached about a month ago and again recently are having an impact on export demand. Not that this was the only determining factor, but it also corresponded with the time of year in which price historically reached a peak.

Another limiting factor may be prices on the Global Dairy Trade (GDT) auctions. For example, the Cheddar cheese price on the bi-monthly GDT auction over the past 12 months has ranged from about $1.30 to $1.70 per pound, with the latest auction results posting a price of $1.36 per pound. This price does not correlate very closely to U.S. milk prices.

The highest GDT price over the past 12 months was posted in January when the Class III price was $17.05. The lowest GDT Cheddar cheese prices took place in May when the U.S. price was $15.23. The September Class III price was $19.00, with October futures indicating a price of nearly $21.00. We can see there is no direct correlation, but an overall steady global price will limit upside potential for U.S. price. Higher domestic prices usually increase imports. According to the latest Foreign Agricultural Statistic Service data, quota imports of cheese for the first nine months of this year totaled 121.0 million pounds, up 6.0% over the same period a year ago. Imports of High-Tier cheese (imports above quota with a penalty) for the same period of time stand at 19.5 million pounds, up 7.5%.

All dairy farmers would like higher milk prices, and if not higher milk prices, then lower feed prices. It certainly does not look as if significantly lower feed prices will be realized over the next year unless things change fundamentally. Corn exports have been slow along with reduced domestic consumption. The price, however still remains historically high. The alfalfa hay price averaged $205 per ton on USDA’s September “Agricultural Prices” report. This is not too much different than last year at this time when price was $198. However, the price is expected to increase as the calendar moves forward. The concern is that there may be a shortage of good quality hay by the time first crop can be harvested next year.

High feed prices will impact global dairy expansion, according to the International Farm Comparison Network (IFCN). They estimate farmers’ costs will increase 5% this year. This could be higher as the report (www.ifcndairy.org) did not factor in the effect of the U.S. drought on grain crops. The total impact may not be realized for some time. The IFCN predicted last year that worldwide demand for dairy products would outpace supply, indicating that “it would take one New Zealand a year” to fill the production gap – the equivalent of 18.9 million tonnes.

U.S. milk production is declining, with September production posting the second consecutive year-over-year decline. Production in all 50 states declined 0.5%. Cow numbers fell 6,000 head below a year ago and mark the first year-over-year decline of cow numbers since August 2010. It appears milk production will decline most, if not all, of next year. There will likely be further herd reductions as the year progresses and feed prices remain high. If a new farm bill or farm bill extension is not implemented soon, there could be a significant increase on farm liquidations over the next few months, which would significantly tighten milk supply.

My current hedging recommendations are to purchase call options for 50% of soybean meal needs through July. Purchase March $460.00 call options for a premium of $20.00. Purchase May and July $450.00 call options for a premium of $20.00. Set targets to hedge some milk if January through March Class III futures reach $20.00.

Upcoming reports:

- Federal Order class prices on Oct. 31
- Agricultural Prices report on Oct. 31
- September Dairy Products report on Nov. 1
- Global Dairy Trade auction on Nov. 6
- Dairy exports on Nov. 8
- World Agricultural Supply and Demand report on Nov. 9


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.

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. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Those acting on this information are responsible for their own actions.