So far this year, Class III milk prices have been running contra seasonal. Historically, price would decline through spring flush and then increase as milk production slowed during the summer and cheese buying interest increased for Fall and end of the year holiday demand However, the last number on year has shown a departure from the historical pattern. There are more factors impacting the market as a change in the way buyers and sellers accomplish business.
One change is that buyers have been more willing to purchase cheese earlier than usual being much more willing to pay more for storing cheese over a longer period of time. This has been evident this year which resulted in the high prices early in the year and lower prices now. Buyers purchased cheese early in anticipation of a tighter milk supply due to heavy culling and reduced milk production that we had seen since late last year. Buyers purchased as a hedge against potentially higher prices unwilling to wait for the usual seasonal low that might not materialize and then having to chase the market higher if indeed milk supply tightened. This reduced the need to be more aggressive with purchases as orders began to increase.
Another impact this year is high inflation driving food prices substantially higher as well as the cost of everything else. Fuel charges were being added to many things that were purchased and delivered. All of this was being passed on to the consumer which reduced demand to some extent. This slowed demand slightly, resulting in inventory higher than it was a year ago even though export demand has been and remains strong.
So why are cheese prices not increasing? Because even with strong export demand and overall domestic demand holding well, there is too much product. The reason is because there is sufficient cheese available in the country with buyers able to purchase what they need from regular suppliers reducing or eliminating the need to come to the daily spot market to purchase extra supply. The daily spot market on the CME is where buyers will come if they cannot purchase sufficient supply through regular channels to fill orders or where sellers will come to sell product when they cannot sell it all through regular outlets. As long as business is being done in the country keeping demand satisfied, there is little reason to do business on the daily spot market. It is a place where buyers and sellers do business when they are unable to accomplish it through regular channels. When there are more sellers than buyers, prices will decline. When there are more buyers than sellers, prices will increase.
There is little concern over a tight market as production of cheese remains strong. The July Dairy Products report showed American cheese production 0.1% above July 2021 with total cheese production 1.1% over a year earlier. Output remained strong even though it was a month of record hot weather in some areas. The same was true for milk production with a gain of 0.2% for the month. Record cheese inventory has been seen this year. It will take reduced production or increased demand to support higher prices and right now that is not happening.
The opposite is true for butter. Price is nearing the record high of $3.1350 that was set on September 25, 2015. What is interesting with butter is that inventory in July, although 21% lower than a year ago, was 60 million pounds more than July 2015 with the record set two months later that year. Buyers of butter have remained aggressive and are maintaining a higher ownership level as a hedge against tighter supply. Export demand is strong as supply is tighter on the world market. This continues to provide strong support to the Class IV market.
It is difficult to determine a cost of production is the current market as there is a lot of movement of costs, but one needs to still do the best job they can in order to determine the best approach to protect income. Flexible marketing strategies need to be implemented to protect the downside of milk prices and the upside of feed prices while at the same time allowing you to captured better prices if they develop.
I will be at the World Dairy Expo this year in Madison, Wisconsin in the AgMarket.net booth TC 664 located in the Trade Center. If you are making plans to attend, please stop by the booth to say Hi and see what we have to offer. The dates for the trade show are October 4th – October 7th.
ROBIN SCHMAHL
September 6, 2022
dairyherd.com
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