06/21/2019
Spot cheese was the star again this week as blocks pushed in to new highs for the year and barrels came within a half cent of matching its 2019 high. The block/barrel average at $1.78/lb settled at a level not seen since Nov 2016. Spot butter picked up some ground this week as well, but both NDM and dry whey finished the week lower.
Spot Market Recap
Class III and cheese futures finished solidly higher across the board, while the other Class III components saw mostly red. Notably, the Class III 2020 contracts began to see more interest and had a solid week as well.
Futures Recap
It was a data-filled week, so lets get right to it. Tuesday started with the morning results of the GDT auction, which were less than inspiring. The dairy price index fell for a third straight time and by the biggest percentage (-3.8%). Losses were led by butter, down 5.7% and cheddar cheese, down 4.3%.
Later on Tuesday the much-anticipated Milk Production Report was released. The report contained a bit for both sides, with bulls noting the 0.4% decline in May milk output, while the bears focused in on the fact that the milking herd grew 5,000 head from April. It was the first monthly increase of 2019.
Despite the negative GDT results and less-than-stellar Milk Production Report, the spot market kept the market moving higher as cheese prices increased every day. The Livestock Slaughter Report was released on Thursday, with the dairy cull up 5.3% vs. a year ago. It was also the highest monthly total for May in decades. It should be noted, however, that just as the weekly slaughter totals are starting to head lower vs. a year ago, the 5.3% increase in May was down from a 7.9% increase in April. Culling is slowing down.
Despite the negative GDT results and less-than-stellar Milk Production Report, the spot market kept the market moving higher as cheese prices increased every day. The Livestock Slaughter Report was released on Thursday, with the dairy cull up 5.3% vs. a year ago. It was also the highest monthly total for May in decades. It should be noted, however, that just as the weekly slaughter totals are starting to head lower vs. a year ago (this week’s was just 200 head higher), the 5.3% increase in May was down from a 7.9% increase in April. Culling is slowing down. Finally, the May Cold Storage Report was released this afternoon. Both butter and cheese stocks came in under most analyst expectations and should provide mild support for the market next week. Butter stocks at the end of May were down 7% vs. a year ago, while American cheese stocks were 2% lower than last May.
Despite the negative GDT results and less-than-stellar Milk Production Report, the spot market kept the market moving higher as cheese prices increased every day. The Livestock Slaughter Report was released on Thursday, with the dairy cull up 5.3% vs. a year ago. It was also the highest monthly total for May in decades. It should be noted, however, that just as the weekly slaughter totals are starting to head lower vs. a year ago (this week’s was just 200 head higher), the 5.3% increase in May was down from a 7.9% increase in April. Culling is slowing down. Finally, the May Cold Storage Report was released this afternoon. Both butter and cheese stocks came in under most analyst expectations and should provide mild support for the market next week. Butter stocks at the end of May were down 7% vs. a year ago, while American cheese stocks were 2% lower than last May. Weekly cold storage numbers put cheese stocks at USDA-selected storage centers down 4% (3.4 million lbs) over the period 06/01 through 06/17, so next month’s report may show a further drawdown.
Dairy Market News this week reports the milk output in Western Europe is past the peak, with unusually early high temperatures likely to bring production down further. The heat is expected to last into next week. Cheese stocks are at a low point, with little ability to increase cheese output due to the minimal increases in milk production.
It’s the off-season in Oceania, and Australian producers are struggling. Feed prices have increased and water for irrigation is limited. Some producers have been reducing their herd size to better manage costs. As producers prepare for the new season, there is uncertainty as to the size of the milk supply, but expectations are that it will be lower than last year.
In the U.S., milk output in the southern regions continues to decline, while in the cooler regions it remains near peak levels. Dairy Market News reports that in the Central region, discounts for spot loads were a little more pronounced, with some being priced as low as $3 under Class. Cream demand remains strong, with ice cream manufacturers pulling hard on butterfat supplies. The market tone for butter is firm, as components will be under further pressure. Dry whey continues to trade sideways, though inventories in some areas were not burdernsome, and orders have recently picked up a bit. The NDM market is weak, as global sales have slowed, and Mexico has not shown much interest. EU prices are also putting downward pressure on the market. However, NDM output is declining as milk output across the country begins to taper. Inventories are fine now, but in come cases are beginning to tighten. Cheese output is heavy across the country, especially with “school milk” now available for manufacturing. Buying interest has improved, however, keeping inventories in relatively decent balance. The market tone is cautiously optimistic.
Despite the improvement in milk prices, many U.S. farms continue to struggle. Winter kill in the Midwest was extensive, and we’re hearing about both feed quality and feed availability issues hitting producers this fall. Add the current crop/planting issues across the grain belt and feed costs could go up substantially in 2020. This growing realization, we thing, may have spurred some long-hedging by dairy end users in the 2020 contracts. Many Class III contracts pushed into new highs, with the Jan-Jun 2020 average settling at $16.70 today. Meanwhile, the July-Dec average settled at $17.36, but almost hit $17.50 intraday. Despite the stronger prices this week, most contracts up front finished at or near their lows for the day. We’re not sure why. It could have been profit-taking, or an anticipation that the spot market is running out of gas. Certainly at $1.78 average, cheese exports will get more difficult. But domestic demand seems to be improving and milk output will continue to decline throughout the summer. Expect more volatility ahead as the market wades itself through price discovery. Producers should try to take advantage of spikes higher like we saw today. Some resting orders of clients that had been sitting more a month or more were hit today near the highs. Give us a call and we’ll help you put in some targets to market a percentage of your production. Put options should also be considered in the front months.
Have a great weekend!
