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Growing Inventory with Reduced Milk Production


June 28, 2022

It seems that cheese has already been impacted by inflation and the potential for a recession. Block cheese price has fallen substantially over the past month with a decline of 29 cents per pound. Barrel price has fallen over 30 cents during the same period. However, as cheese prices began to fall, Class III futures moved higher as traders remained optimistic the decline would be short lived. After all, demand was reportedly good, and exports were strong. Milk production was lower than a year ago with lower cow numbers. Due to milk futures setting record highs during spring flush, traders thought it was setting the stage for still higher prices later in the year as demand increases seasonally. The mistake that was made was focusing on lower milk production, lower cow numbers, and seasonality. Even though there were warning signs that high food and fuel prices might have an impact on demand, they seemed to be ignored. The general consensus of the trade was bullish.

In my previous article, I made the comparison of the impact the great recession of 2007 to 2009 had on milk prices and it was not positive. So, this should have not been totally unexpected. But as usual, the market moves dramatically when it does. That is certainly what has transpired over the past month. Class III milk futures had been carrying a premium to underlying cash for a time due to the bullish attitude that had been prevalent in the market. This was unusual as generally futures carry a discount to the daily cash price calculation which I keep track of on a daily basis and is posted on DTN’s dairy platform. For a short period of time, it has been holding over $2.00 premium to the cash calculation. This premium has been reduced to about $1.00 and still a moving target. The pricing of July Class III and IV prices has already been underway as far as the trade is concerned as they calculate the weekly price averages. It will be difficult to determine the price average for July with the current volatility.

Buyers of cheese had already purchased some supply ahead of time to prepare for the potential of a tighter market as the year progressed. The retail and the food service industry placed orders earlier to ensure their needs would be met when needed. When the outlook of the potential of slowing demand and a possible recession began moving to the forefront, buyers decided they may have already purchased too much, too early. Now they are not so interested as it looks like there will be sufficient supply for demand and who knows, maybe too much.

The May Cold Storage report was not bearish as far as a seasonal increase of inventory was concerned, but bearish from the standpoint that inventory increased even though milk production this year has been lower than last year. American cheese inventory declined the first two months of this year but has since caught up and was 4% above a year ago according to the report. American cheese stocks of 857.9 million pounds are the highest inventory since January 1985 and the highest inventory for the month of May since 1984.

Total cheese stocks increased 31.1 million pounds in May pushing inventory to 1.512 billion pounds. The real kicker here is that this is the highest inventory level in over 42 years. I have records back to 1980 and this is the highest. I would venture to say that this is a record for cheese inventory as inventory of total cheese in January of 1980 was around 500.0 million pounds. It then grew to over one billion pounds until the Whole Herd Buyout was implemented which reduced inventory substantially.

So, what is going to reduced inventory this time? We know there will not be another Whole Herd Buyout and not another CWT herd retirement program due to the controversies and legal issues related to the CWT program. It will need to be up to both domestic and international demand. With the current financial situation in the U. S. as well as other countries of the world, this does not look very promising. A recession could have a significant impact on milk prices. Hopefully, inflation will be brought under control quickly and a recession averted. However, the impact is already being felt.

Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in trading commodity futures and options on futures. It may not be suitable for everyone. This material has been prepared by an employee or agent of JSA and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.

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