Perception Plays a Role in High Prices
Mar 17, 2014
Here’s why both buyers and manufacturers are more confident about dairy price direction and cheese production.
We are witnesses of new records being established. Both block and barrel cheese prices set new records at the beginning of February before declining from those levels with the belief a top for the year had been established. However, a little over a month later, block cheese surpassed that level to establish another new high.
Current cash price movement is contra-seasonal, with historical patterns suggesting price weakness as milk production increases at the same time demand slows. This is the time of year when inventory rises as demand is met with extra production moving to storage to be held for later demand.
There seem to be two things taking place at the present time – one fundamental and one perception. Milk production is improving across the country, with Midwest production growth lagging other areas due to a severe winter that’s not allowing normal milk production growth. This has changed with weather returning to more normal conditions and production responding.
However, this is not the fundamental reason for continued high prices. The main reason is continuing strong exports. January cheese exports increased 46% over last year, totaling 32,118 metric tons (MT). Whey exports increased 0.2%, reaching 39,683 MT, butter exports rose 136% at 10.169 MT, and nonfat dry milk exports climbed 22.0% to 38,761 MT. The strong export pace continues supporting prices. There is no indication of this slowing anytime soon as long as U.S. prices remain competitive.
The perception supporting the market is that both manufacturers and buyers are more confident that prices will remain strong. Manufacturers were limiting cheese production to keep pace with demand, and buyers were holding back, waiting and hoping for lower prices. However, buyers cannot wait any longer with the risk of holding high-priced inventory falling to the back recesses of the mind. The feeling is that strong prices now point to stronger prices later this year. This provides the confidence for buyers to purchase at high prices. It also gives manufacturers more confidence to increase cheese production without the fear of the bottom falling out of price.
This overall feeling keeps buyers aggressive and willing to purchase for upcoming demand. Market sentiment has switched from one of purchasing on an as-needed basis to one of purchasing for future demand. As long as consumers are willing to purchase dairy products at higher prices, support will remain under the market.
USDA estimates milk prices and product prices will improve in 2014 compared to 2013. If these prices come to fruition, the All-Milk Price will be up $1.69 to an average of $21.70 per cwt. The average Class III will increase $1.26 from 2013, at $19.25. Class IV will rise $1.65, at $20.70.
Interestingly, USDA left 2014 milk production unchanged from the February estimate at 205.7 billion pounds. This indicates higher milk checks are not expected to result in an increase in milk production. I venture to say this will not be the case, as high milk prices spur greater milk output. It is unclear how much potential there is for milk production growth.
- Global Dairy Trade auction on March 18
- February Monthly Milk Production report on March 19
- February Livestock Slaughter report on March 20
- February Cold Storage report on March 21
- Agricultural Price report on March 28
- Planting Intentions and Quarterly Grain stocks report on March 31
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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