John Billington - Analyst at Ever.ag
September 10, 2021
COVID-19 is spurring complications across the U.S. dairy supply chain, curtailing domestic demand and export flows during a time of record milk production. On the farm, output continues to surpass the three-year average and beat out year-over-year production, as seen in the figure below, which pulls from USDA milk production numbers. On the manufacturing side of things, we have seen inventory capacity problems at most warehouses around the U.S., as seen in the figures below regarding cheese and butter stocks.
We currently lack a labor force to drive trucks from producers to manufacturers. Once milk is shipped to processors, most plants already have too much product on hand. As a result, the additional milk is placed in storage. Further complicating matters are all the fees to store product at U.S. ports amid record backlogs. However, despite logistics challenges, U.S. dairy exports are still managing to reach new records.
The cheese market provides a more granular example of logistics issues in the dairy industry. Block cheese is processed as either 640-pound or 40-pound blocks. To ship cheese, manufacturers typically buy wood crates that can carry 640-pounds. However, due to high lumber prices, we have seen a pullback in block processing. In fact, costs to process block cheese rose so high, cheesemakers started processing more 500-pound barrel cheese, which uses “vacuum sealed” plastic packaging. With additional barrel production and supply, prices are trading near $1.30 per pound, while block prices are near $1.70.
As uncertainty persists, hedging can help offset some of the underlying risks in today’s transportation and logistics markets. To hedge downside risk and take advantage of some of the upside potential, we recommend Dairy Revenue Protection (DRP). No one knows what the future holds, so make sure you manage what is within your control.
* The risk of loss trading commodity futures and options can be substantial. Investors should carefully consider the inherent risks in light of their financial condition. The information contained herein has been obtained from sources deemed to be reliable, however, no independent verification has been made. The information contained herein is strictly the opinion of its author and not necessarily of ever.ag and is intended to be a solicitation. Past performance is not indicative of future results.
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