11/01/2019
Both barrel cheese and NDM made new multi-year highs this week as the bull market continued to power higher. Scarcity of barrels resulted in a gain of 7½¢ for the week with no trades. Blocks advanced as well, helping the block/barrel average to a fresh multi-year high of $2.24/lb. Butter and dry whey both managed to stop their slide lower, perhaps indicating a short-term bottom is in.
Spot Market Recap
Futures remain at a steep discount to spot prices, only begrudgingly moving higher, but the strength in the spot market this week did push Q1 Class III futures to a new contract high average of$17.42. The 2020 annual average also put in a new high of $17.26. A lot can happen between now and then; mother nature could send prices higher or lower. But for those operations with a healthy basis above Class III and have strong components, this type of profit margin for the year is not a bad thing to protect. Most operations that participated in DRP did so at much lower levels, so it may make sense to take on additional protection (hedging) here. For those that can still take out insurance, getting Q1 at a contract high would be a good place to do it. KDM is now in the position of offer that service, so give us a call if you are interested in getting a DRP quote.
Futures Recap
Nov Class III gained 99¢ last week and picked up another 64¢ this week, but is still below current spot prices, which work out to about $21.25/cwt. Even with two weeks of it’s calculation complete, there is still room for this contract to move higher over its final calculation weeks, if cheese prices are able to hold. But till they? Dairy Market News reports this week that barrels are still tight in the Midwest, with some operations oversold. Demand out of Mexico, in addition to U.S. government contracts is helping maintain a bullish tilt to the barrel market. That bodes well for barrels holding, but the spike in spot cheese has put a damper on buyers, and some cheesemakers are shifting production to cheddar blocks. Case in point; blocks slipped from their mid-week high of $2.17½ as sellers started to offer a few loads, where they had previously been absent. Block trade volume has picked up for four consecutive weeks, so one could expect that trend to continue into next week. And as we mentioned last week, there’s a stronger likelihood of a lull in demand as we get a couple weeks out from Thanksgiving. We’re not suggesting a complete market collapse, but a retracement, putting in a higher low, before starting to gain ground again post Thanksgiving. At these prices, producers are going to make as much milk as they can, hanging on to cows that weren’t profitable a couple months ago. It’s probably already happening. Dairy cow slaughter for the week ending 10/19 totaled 61,800 head, down 4.8% (3,900 head) compared to the same period last year.
Bottom line is, fundamentals are still largely favorable, but we’ve taken this market sharply higher in a short amount of time. We would expect a correction some time in the near future. Take advantage of these higher prices and get something done! Call us next week and we’ll help you put together an executable plan!
Have a great weekend!
