By Robin Schmahl, AgDairy LLC
There certainly are some good things happening in the dairy markets. Cheese prices have made new highs for the year, with butter reaching a multiple-year high. This has created a somewhat bullish attitude among traders and farmers alike.
A comparison has been made to last year when the cheese price reached $1.72 in early December despite slower demand resulting from the domestic and world economic situation. So, why could not we see a repeat of this or even more as the second half of the year progresses? Prices are significantly higher than they were last year.
Butter has certainly reaped the benefit of a tighter market. After spending much of 2007-2009 below the cheese price, it has finally led the charge to higher prices. Butter price has long been the indicator for the direction of cheese. Many times, cheese prices would follow butter within the period of two weeks.
Of course, there are always exceptions to this rule as we have seen a few times in the past. Improving exports have had a significant impact on this market. For the first five months of this year, butterfat exports increased 128% over the same period last year. Butter inventory for June was 25% lower than a year ago. Stocks are the lowest they have been for the month of June since 2005 and current price is the highest it has been since 2004.
Earlier, there was concern over the impact on exports when the European Union was to release some of its intervention stocks. However, this concern has been put to rest as the butter price has not been impacted, with European supply remaining tight. Actually, the U.S. butter price has risen significantly and has narrowed the gap in world prices.
A tight cream market has had a significant impact as well. Ice cream manufacturers as well as some other Class II product manufacturers have been competing for the available cream. More milk was diverted from bottling to cheese manufacturing when schools closed, creating a tight market in which some butter manufacturers decided to sell any extra cream rather than churn it. That has since changed due to the higher butter price, with most opting to now churn rather than sell cream.
Cheese is not as tight, but price still moved higher, breaking through the formidable $1.51 level and quickly moving to $1.60. Limited trading had been done on the spot market over the past few weeks. There has been a rumor floating around that more cheese would come to the spot market once price reached and exceeded $1.60. More has come to the spot market, reviving the question whether buyers will step back and see how aggressive sellers will be.
June cold storage indicated there is plenty of cheese in storage, limiting the need to purchase fresh cheese for aging programs. American cheese stocks are 4% higher than a year ago at 628.4 million lb., other natural cheese stocks are up 3% at 371.4 million lb., and total cheese stocks are 4% higher at 1.027 billion lb.
Fresh cheese demand is carrying the ball and will be key to sustained prices. Reports are that some featuring of dairy products by retailers has been significantly scaled back or in some cases cancelled due to the higher prices. Whether this will have any impact is yet to be determined.
June milk production was a surprise, posting an increase of 2.4% over a year ago for all 50 states. Cow numbers increase by 11,000 head, with production per cow up 64 lb. over June 2009. It is natural that a better price outlook increases the desire to produce more milk to make up for lost income. Cow numbers have increased 40,000 head since December.
Implementing hedging strategies has been difficult for 2011 since much of the increase in Class III futures has taken place in closer months while later months have actually declined. The market will need to prove itself before traders will be interested in putting more price premium in 2011 contracts.
- July class prices on July 30
- July Agricultural Prices on July 30
- June Dairy Products report on Aug. 2
- Fonterra auction on Aug. 3
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. Those acting on this information are responsible for their own actions.