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Cheese Futures Portend Higher Prices Ahead

December 16, 2020

Rallies in Class III futures have been amazing over the past two weeks, with the FEB through DEC contracts setting new record highs. Since Nov. 30, the FEB 2021 contract increased $1.05 and closed today at $17.30, a 6.5% rally in just two weeks. Volumes have been light and day-to-day trading has been volatile, but the overall trend until today was clearly higher.

The recent approval of Covid-19 vaccines in the United States and elsewhere, along with the subsequent roll-out of these vaccines, could be fueling the rally, as dairy buyers anticipate an increase in cheese prices as the economy returns to normal.

Weak economies and markedly decreased foodservice sales have been hallmarks of the Covid-19 pandemic; a return to normalcy could mean an increase in dairy demand, as all of these trends reverse course. Market chatter about another round of government buying, albeit likely smaller than the previous rounds, could also be helping to buoy Class III futures. The Emergency Coronavirus Relief Act of 2020, currently under consideration in Congress, sets aside $500 million for dairy donations. The whey market offers another sign of optimism. Dried whey prices have slowly strengthened from the mid-July low of 28.75¢ to today’s close of 46.5¢. A weaker dollar also likely means an increase in U.S. exports. The recent weakening of CME spot cheese prices from their highs, along with yesterday’s increase in the Global Dairy Trade cheese, have finally made U.S. cheese competitive globally.

However, none of this changes current dairy market fundamentals. Milk supplies globally have increased in 2020. U.S. milk production is up 1.9% year-to-date through October, compared to 2019. Butter stocks remain burdensome; overproduction has driven October’s butter stocks 28% above October 2019 levels. Through October, U.S. butter output was 5.5% greater than in the first 10 months of 2019. CME spot cheese markets have remained quiet during the recent Class III rally—block prices traded at $1.66 on Nov. 30 and closed near that mark today at $1.65.



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