A second holiday-shortened week saw cheese prices continue to bounce off recent lows, but Class III futures continued to retreat. However, we begin 2020 with a Class III average of $17.33/cwt, which, if it were to hold, is the highest average annual price since 2014, when we finished the year at an unprecedented $22.40/cwt. Dec Class III future’s official settlement was $19.37, putting the 2019 annual average at $16.96.
Spot Market Recap
The domestic situation continues along seasonal trends. Milk production is gaining traction in most parts of the country, and there was excess milk available over the holidays. Cream is abundant across the country. Cheese output is fairly strong as discounted loads of milk were offered at $6 to $8 under class in some regions. That makes cheap cheese. Holiday demand is basically done, but playoff season is hoped to improve pizza cheese interest in the coming weeks.
On the international side, massive wildfires in Australia may impact milk production, with manufacturers thinking that dairy end products may be a bit tight during Q1. Milk output in New Zealand is declining seasonally, while financial stress on dairies is growing. Reports from the EU indicate milk output is not increasing at the rate originally projected. However, cheese demand is in a post-holiday decline, so manufacturers have been able to begin to build stocks that were nonexistent just a few weeks ago.
Geopolitical events, ongoing trade negotiations and an escalation in Middle East tensions could all play a role in determining milk prices in 2020. We may trade sideways for a bit until more fundamental news drives price. Slaughter numbers continue to lag, but the market has already sold off and is now trading close to parity with the spot market. Producers who have nothing hedged in 2020 and have a solid basis may want to consider getting some milk covered at this $17.33 level, which is only 40 or so cents off the life of contract highs. We would not recommend doing more than 25%, however. Until then, we watch this consolidation for a breakout one way or the other. 2020 is looking like it could be another volatile year.