07/26/2019
Considering it was a “data heavy” week with several important reports released, from a trading perspective, it was quiet, with lighter volume in spot and most dairy futures little changed when the dust settled Friday. The exception to that was butter, which saw heavy losses up front, despite a tightening cream supply. Prices were pressured from bearish Cold Storage numbers (more below).
Spot Market Recap
Futures Recap
Dairy cow slaughter for the week ending 07/13 totaled a robust 61,200 head; the highest weekly total in 3 months, and up 5.3% compared to the same week a year ago. However, the monthly Livestock Slaughter Report culling slowed down in June. Just 231,200 cows were removed from the milking herd in June, down 2.7% vs. June ’18 and the lowest total for the month since 2016. It was also the first time since Sep that the YoY cull rate was lower than the prior year.
Finally, the Cold Storage Report was released, showing butter stocks at the end of June were down 3% vs. a year ago, but up 4% vs. May. The somewhat sharp increase from May is in contrast to what is usually a seasonal decline, as can be seen below.
American cheese stocks at the end of June were down 2% from 2018 while total cheese stocks declined 1%. American cheese holdings finished the month at a 2-year low.
Dairy Market News updates this week were mostly supportive. The highest temps of the summer have hit much of the U.S., with milk output declining nearly everywhere but the Pacific Northwest. Extra milk is getting harder to find in the Northeast and balancing plants are clearing lower volumes. Schools are opening in the Southeast, with milk coming from other regions to supply needs. Production has tightened markedly in the Central region, with spot loads now trading above Class III. Cream in the region is tight as ice cream manufacturers claim the bulk of supplies, leaving butter churners with little to nothing left. Not temps in CA are keeping milk output from increasing and components are dropping. The milk supply is also tightening in AZ and NM leaving manufacturers just enough to fulfill processing requirements. Heat is also having an effect on cheese output as cows are getting more uncomfortable. Cheese industry contacts are noting the bullish sentiment regarding declining inventories. Cheese demand is steady, but some curd and mozzarella producers reported strong ordering this week. Cheese stocks at USDA selected storage centers declined 3% over the period 07/01 through 07/22.
On the international front, a second heatwave swept in over the EU this week, with Paris hitting a new record high of 108.7F on Thursday. Records were also broken in Germany, the U.K., Belgium, Luxembourg and the Netherlands. The heat did not let up much overnight, so it will be interesting to see how this affects milk output in these regions.
Despite more indications that the milk supply is tightening, the size of the herd is declining, cheese inventories are falling and heat across much of the globe, Class III futures saw little reaction. Part of the reason is that prices have already made a substantial move higher. Cheese futures are already above $1.85/lb Sep-Nov, so much of this is already priced in. We wouldn’t necessarily say the top is in yet, however. We could see more technical retracement/weakness as the markets pause at these levels. We haven’t been here in three years. That said, we are still bullish the market longer term, and see less downside risk than upside. Producers with milk already locked in at lower prices should take action on down days to try and open the upside to those contracts. Consider bull-call spreads or 3-way option spreads that can add $1-2/cwt or more to your fixed contract for little cost. Call us next week for some examples if you’re not sure how they work. We’d be happy to walk you through it.
Have a great weekend!
