The KDM Dairy Report 03/29/2019


Spot cheese traded in to new highs for the year, though blocks finished off its peak of $1.73 on Wednesday. Blocks haven’t been that high since last October. The block/barrel average has convincingly broken the downtrend going back to 2017 (blue line), but ran in to resistance around the $1.67 level (orange line), a price point it’s failed to break through twice before. The question now is, will we crash back through the trendline, or retest it and head higher?

The gain in spot cheese prices was enough to power Class III futures higher for the week (see summary below). But even when blocks peaked on Wednesday, futures were reluctant to rally. Each daily gain in spot was met with significant selling, keeping futures at a significant discount to spot. Current spot prices (using April dry whey futures) work out to about $15.85 Class III. When adding NDPSR basis, it’s easily north of $16. The April contract is half way through its pricing period, so the spotlight will be on May very soon. With a May settlement of $15.39 today, traders are betting that spot cheese prices will be heading lower in the near term. They may be right. The milk flow is increasing across most parts of the country, keeping processors, as well as auxiliary balancing plants near capacity. That said, Dairy Market News reported this week that Florida was already past its peak.

Dry whey prices continue to decline as domestic inventories are building. Sales to China have almost evaporated due to the spreading of African swine fever. Sellers are bringing their excess product to the CME Group spot market, which explains the big uptick in trade volume and lower prices.

Butter processing across the country is active and inventories are sufficient for current demand. But competition for cream is starting to rise with the warmer weather, as ice cream production begins to ramp up. Baking season is also around the corner, which should improve domestic demand.

NDM is being produced in much higher volumes than is being moved, leading to some concern about managing inventories. Manufacturers are hoping for an uptick in demand soon. Cheese output is ongoing across the country and plants continue to limit production at times to keep inventory in check.

Cheese makers report that sales have picked up over the past few weeks. Curds are moving well and barrel producers report in an increase in buyer interest. Current milk output is in good balance with processing needs. Grilling season has started in southern parts of the country, and will get into higher gear soon in the rest of the country. The new federal milk marketing order in California is reshuffling how milk flows in the state. Some cheese plants are holding back on production while others shift away from American-style cheese to other natural of specialty cheeses. Some are diverting milk into other dairy products altogether. The net effect is less cheese is being made in the state, and more butter and milk powder.

This week’s dairy cow slaughter saw 71,100 animals exit the herd, up 6% vs. a year ago. YTD the cull is up 42,600 head vs. a year ago. We continue to hear about the potential for replacement heifer shortage as we head in to Q4. The stream of youngstock has declined as well, which will make it difficult for farms to expand for quite some time, even if prices rebound substantially.

Finally, weekly cold storage numbers continue to reflect a strong pull for cheese. Stocks declined 4% (3.5 million lbs) over the period 03/01 through 03/25.

Going forward, with the spring flush upon us, we would expect continued pressure in both the spot market and futures prices. But we think it will be short-lived. We should put in a higher low, followed by stronger prices. Producers may want to market any May-June still at risk, on any price strength. We would not aggressively sell July-Dec. Looking much further out, Jan-Jun 2020 Class III futures are all under $16. Given current financial stress and limited growth potential, those prices look too low. End users of dairy products should consider long-hedging (buying) those contracts. Have a great weekend, and call us if you would like to discuss possible risk management strategies!

Futures Recap
Futures MonthClass III 03/22Class III 03/29ChangeCheese 03/22Cheese 03/29ChangeDry Whey 03/22Dry Whey 03/29Change
12 Mo Avg$15.84$15.94$0.10$1.643$1.652$0.00937.879¢38.000¢0.121¢


Futures MonthButter 03/22Butter 03/29ChangeClass IV 03/22Class IV 03/29ChangeNDM 03/22NDM 03/29Change
12 Mo Avg230.538¢230.881¢0.344¢$16.39$16.50$0.11102.156¢103.144¢0.988¢
Spot Market Recap
Spot Product3/223/29Change
Cheddar Blocks$1.5700$1.6450$0.0750
Cheddar Barrels$1.5650$1.6025$0.0375
Grade A NDM$0.9575$0.9625$0.0050
Dry Whey$0.3300$0.3225($0.0075)


Spot Market Trade Volume
Grade A NDM
Dry Whey