December 30, 2019
The past year has certainly been an interesting one. Milk prices began the year very low, but then ended at a five-year high. The rally of Class III milk prices through the end of the year was a surprising one due to the fundamentals that dominated much of the year.
Even with many farms exiting the dairy business, milk production continued to increase with strong production per cow. The result has been more milk produced this year than last year. Yet, that milk found a home. Demand for cheese was strong enough to keep buyers aggressive. It was the first year inventory of American cheese began the year at its highest level and either held or declined throughout the year. Generally, it follows a seasonal pattern during which it increases the first half of the year and then decreases the second half. Exports of cheese have held well remaining above the previous year despite the political issues impacting exports throughout the year.
Barrel cheese supply tightened significantly later in the year which caught buyers off guard resulting in barrels moving from a deep discount to blocks to a record high above blocks. However, once barrel demand was filled, price fell setting a record decline over a one week period. It was interesting to see how barrel supply could go from tight to plentiful in such a short period of time.
African swine fever had a substantial impact on whey demand on exports to China. The impact was from lack of animals to feed and not due to tariffs. This will take some time to rebuild. Total whey exports for the first ten months of the year are down 22% from the previous year.
Class III futures had maintained a steep discount in 2020 contracts relative to the last quarter of 2019. Traders were correct in their assessment that milk prices in 2020 may not be as strong as they were during the last four months of the year. There currently is no discount in Class III futures next year with contracts showing a minor seasonality. Unfortunately, prices are in the $17.00 range. The positive aspect is that the first half of 2020 futures contracts show an average Class III price of $17.29 compared to the first half of 2019 at $15.25. However, this changes a bit for the second half of 2020 which shows a current average of $17.52 compared to the second half of 2019 at an average of $18.66. Much can happen during the year as we see every year and if we stay the course, average milk prices should be better next year.