The KDM Dairy Report 08/02/2019


Spot cheese gave up some ground this week, settling at an average $1.76/lb. Blocks seem somewhat well supported with underlying bids in most sessions and just 3 trades, but barrel offers helped widen the spread on heavier volume of 24 trades. Spot butter was also weaker, hitting its lowest price since May.

Spot Market Recap
Futures Recap

Futures responded with heavy losses in most categories, though Friday saw a relief rally. It’s hard to say why the markets sold off this week, with fundamentals still mainly supportive.

The Dairy Products Report was released with week with a mixed bag of data. On the positive side, cheddar cheese output during the month of June was down 1.9% compared to a year ago.

But total cheese output increased 0.2% as Italian varieties jumped 4%. Butter output was also strong, registering a 3.1% gain and NDM production increased 2.2%. However, dry whey output fell 5.9% YoY and was below 3 of the last 4 years.

Weekly cold storage updates indicate cheese stocks at USDA-selected storage centers declined a strong 5% (4.6 million lbs) during the month of July. Combined with lower output in June, that should support cheese prices.

On the international front, Dairy Market News reports milk output in the EU was affected by the recent heat wave, but expectations are that it will only be a brief set back. Cheese sales are reported as strong, with inventories on the lighter side.

Milk output in the U.S. varies by region. From the Northeast to the Southeast, production is dropping as heat and humidity are affecting the cows. Milk is being imported into Florida and parts of the south from other regions. Some schools are beginning to reopen, pushing Class I orders higher. Cream is tightening. In the Central region, cheese plants are cutting back production schedules as fewer spot loads of milk are available. Feed rations on farms remain a concern as farmers report silage stores are thin. Strong ice cream output has buyers looking west for available cream. Heading west, California output is declining due to hotter conditions. There’s enough milk for manufacturing at the moment, but there is concern the 100+ temps could cause output to drop further. It’s hot in Arizona, leaving manufacturing plants running at less than full capacities. Milk orders are trending higher in New Mexico while milk output is down slightly. Moving the the Pacific Northwest, output remains quite strong and manufactures are full of milk. Spot loads are being discounted $4-5 under Class.
While cream is mostly tight across the country, butter demand is in the summer doldrums. Buyers are holding out and waiting for better prices. Dry whey prices are mostly steady, but there is a growing expectation that stocks may begin to tighten with lower cheese output and declining milk supplies.
Cheese output in the NE is still running at full capacity. However, spot milk is becoming harder to find as milk production drops in the region. In the Midwest, curd and process cheese sales are reported as positive and over cheese demand is meeting expectations. Spot milk availability is dwindling, causing some cheesemakers to cut schedules back from seven, down to five/six days. Most spot milk is carrying a premium to class. There’s plenty of milk for making cheese in the West, but good demand is keeping cheese stocks in check. Contacts say cheese inventories are comfortable.
This week’s pull-back in the dairy markets offers an opportunity for producers to enhance their hedges. While milk availability is still strong west of the Rockies, overall the supply is tightening across the U.S. With the rollout for schools upon us shortly, manufacturing milk will undoubtedly tighten further. Fall sports usher in pizza season, pushing mozzarella demand higher. Producers we spoke to this week also mentioned availability of replacement heifers is not what it was a year ago. It will be more difficult to rebuild the herd this time around. Dairy operations that have milk locked in at a fixed price should consider call options and bull-call-spreads to help open those contracts to higher prices.
Recent trade tensions with China may hurt dairy exports, but an agreement with the EU on beef exports will help Ag in general and may put pressure on China to get a deal done. Time will tell!

Have a great weekend!