The KDM Dairy Report 07/19/2019


Class III and cheese futures ignored the weekly decline in spot block and barrel prices, finishing solidly higher. Dry whey also continued to carve out a bottom and was higher in both spot and futures.

Futures Recap
Spot Market Recap
It will be an abbreviated report as we are on the road. No major reports were released this week, although the semi-annual Cattle Inventory Report had some interesting data. Milk replacement heifers 500-lbs and over were down 100,000 head (2%) vs. a year ago. At 4.1 million head, the number of replacement animals in the pipeline is less than half the size of the current milking herd, which sits at 9.3 million head. We think this will make it more difficult to rebuild the herd rapidly, despite higher milk prices going forward.
Milk production around the country is getting tighter, especially East of the Rockies. Components are also falling, affecting yields. Cheese output is still robust in most areas, but demand is solid. Cheese stocks at USDA-selected storage centers declined 2% over the period 07/01 through 07/15. Hot weather across much of the country is boosting ice cream sales and cream continues to tighten.
In summary, the technical response higher in futures despite a declining spot market is bullish. Weather may be playing a role here as expectations are for a decline in milk output over much of the country experiencing heat. And we hate to mention it to the kids, but school openings are around the corner for some districts, meaning Class I demand will increase soon. While there is still plenty of cheese in warehouses, the fall demand season will be here soon and manufacturers want to ensure they have enough supply. We may continue to see some chop up and down going forward, but we still think the market is well supported and will eventually make another leg higher. Producers with milk sold/locked at lower prices should consider buying call options or bull-call spreads to add value to those contracts. We had some success with this early in the week when prices headed lower. Make a plan and execute it!
Have a great weekend!