The KDM Dairy Report 09/13/2019


Wow! Is the dust settled yet? Spot cheese ripped higher this week, slicing through the $2 barrier like a buzzsaw, without so much as a glance back. The block barrel average now sits at $2.06/lb. More telling, offers were few and far between on the way up, while bids were often stacked. Butter saw the most activity, with 55 loads exchanging hands.

Spot Market Recap

After weeks of puzzlement on our end, futures finally reacted, culminating in a limit-up day for the October contract on Thursday. None of us in the office can even remember when that happened last.

Futures Recap

There were no major reports released this week, though the World Ag Supply & Demand Report revised their projected Class III and cheese prices higher for 2019 and 2020. USDA raised their estimate by 50¢/cwt from last month, now expecting Class III to average $17.05/cwt in 2020. Jan-Dec 2020 futures settled at $16.92 today.

So why the violent reaction this week? Just as it affected the September contract last week, the refusal of the spot market to fall has forced the front months higher. As we mentioned in the previous report, the October contract begins pricing on Monday and was trading woefully behind spot prices. Even with the sharp rally this week, it’s still trading at a significant discount. Current spot prices work out to about $19.95 Class III, not including NDPSR basis, putting a theoretical October settlement above $20/cwt. We haven’t seen a $20+ settlement since November 2014.


Dairy Market News reports cheese demand is still strong, despite the higher prices. Milk is tightest in the Midwest, where most of the nation’s cheese is still made. In particular, 30-day block cheese is in short supply, while barrels are more available. It appears this has caught some buyers off guard as well, right when an uptick in demand from school openings and seasonal pizza sale increases are in play. We heard over and over again this week about forage/ feed being tight in WI and MN. This could keep milk production in the Midwest muted for some time. Finally, cheese plants in the region are not getting as much milk as they were last week, due to more loads being exported to the Southeast as it recovers from the hurricane.

But now the obvious question, how long can we sustain these prices? It’s obvious we now have the most expensive cheese in the world by far, so exports will struggle. That said, the recent warming between China and the U.S. over trade issues could help. Grain prices were sharply higher. We also need to remember that it was 5 years ago the last time we had $2 cheese. While inflation is very tame, $2 five years ago is equal to $1.85 in today’s dollars. Some day, $2 cheese will be cheap. We’re not suggesting that $2 cheese is here to stay, just that psychological barriers will eventually be broken and become meaningless. Is this that time? We don’t know.

Hedgers should be putting floor price protection in place in Q4. While the front months will likely see volatile swings in the coming days, the tight cheese situation doesn’t look ready to end just yet. That should help propel Oct/Nov futures higher. The 2020 contracts reached a high settlement of $17.13 on July 22nd. Currently at $16.92, look for that high to be challenged in the weeks ahead. Consider setting some targets at $17.50 average as a start to some light hedging.

Have a great weekend!