The KDM Dairy Report 06/28/2019


Block cheese, barrel cheese and butter all made new multi-year highs in this week’s spot market. The block/barrel average settled at $1.82/lb, finally breaking above prior resistance near $1.78. The next level of resistance would be the high near $1.90/lb, made in Nov 2016. Spot butter settled at $2.41/lb, a level not seen since the week of June 1st, 2018. Spot buyers were aggressive, with trade volume up significantly for both butter and cheese.

Spot Market Recap

Class III futures pushed in to new highs in step with the spot market, especially the front months as they needed to play catch-up to spot prices. Futures could move even higher next week, as current spot components work out to about $17.65 Class III, not including the weekly NDPSR positive basis. One would think that the basis would narrow as spot prices have rallied, but time will tell. Even so, prices are trading at a discount without the basis.

Futures Recap
A lot of factors were probably behind this week’s rally. Last Friday’s Cold Storage Report came out after the close and may have caught some trader’s by surprise with its supportive numbers. Weekly cull numbers continue to outpace year ago levels (up 3.3% this week) and a heatwave is gripping Europe, with Paris recording new all-time record high of 112 degrees. Germany and France are both large milk producers in the EU, so this early summer heat could impact production for the balance of the summer. Over in Oceania, May milk production in Australia was down 13.6% vs. the prior year, bringing their July-May milking season down 7.7% YTD. Rabobank released its quarterly dairy report this week, citing a tightening milk supply and reduced stocks on a global level. They predicted continued support for dairy prices heading in to the third quarter, with limited growth in the milk supply for the balance of 2019.
The updates from Dairy Market News this week indicate milk is still flowing well in the Northeast, keeping many plants on full schedules. Balancing plants in the Mid-Atlantic are running near capacity as well. But further south, milk production is past the peak and declining, especially in Florida where temperatures have hit 100 degrees. Spot loads of milk in the Central region were briefly discounted post Memorial Day, but have tightened back up. Feed rations are short in the region, which will continue to pressure smaller farms. Milk supplies in California are described as “tight” and spot prices are trending higher. Some Class III operations are planning to reduce their output due to higher milk prices. Output in the Southwest is seasonally low, but in the Pacific Northwest, processors are remaining full. Cream is getting tighter across the country, especially as components continue to decline. As a result, butter manufacturing is declining, and lower than current demand. The market tone is firm. Dry whey inventories are growing in the Northeast due to the ample milk supply and heavy cheese output. Supplies are a bit more in balance in the Central and Western regions, but lack of demand continues to result in a weak market. Buyers are hesitant to take on any extra loads. The same is true for the NDM market. Despite the milk supply beginning to contract for the season, lackluster demand is keeping sales on the slow end beyond what was contracted. Cheese demand is good across the country, with contacts in the East reporting a demand climb, while Western contacts report an uptick in interest from both Mexican and Asian buyers. The new demand from Mexico is attributed to tariff reductions. Cheese stocks at USDA-selected storage centers fell 4% (3.4 million lbs) over the first 24 days of June.

With an improving demand situation, continued feed issues in the Midwest and potential drop in output in the EU, we could be setting up for more price strength next week. Producers should continue to reward these higher prices with PUT options. One negative about DRP is once it’s purchased, it can’t be rolled up to a higher level, like PUT options can. If futures prices continue to climb, most of those DRP policies are going to expire worthless. It may be wise to look at some higher levels of protection to replace your DRP insurance if premiums come down enough. Give us a call to discuss what might work for your operation.

Have a great weekend!