The KDM Dairy Report 02/28/2020


Coronavirus panic had its way, with the stock market seeing its worst weekly loss since 2008. The “risk-off” mentality by investors spilled in to the commodity markets as well, with everything from crude oil to grains taking a beating. Dairy was not immune, but it appears most of the damage has already been built in and we may be carving out a bottom. Barrel cheese held steady at $1.59 in the spot market, with just 4 loads exchanging hands. Blocks lost some ground but trading was light was well. Sellers just didn’t see to want to push things much lower. Finally, both butter and NDM saw heavy trade volume as buyers sensed value at those levels.

Spot Market Recap
Futures Recap

Dairy Market News reports milk output in the Northeast is picking up, with balancing plants receiving high volumes. Regional manufacturers are running close to capacity. Output is also strong in the Central region, there are some reports of poorer component levels due to feed quality. Spot loads of milk are available for $1 to $5 under Class, but that is a smaller discount than in years past. In the West, California milk production is higher than expected, indicating the flush may have arrived early for them. Milk is abundant in Arizona and New Mexico, keeping plants full, though Class I pulls from the East are helping. Milk output is heavy and components are strong in the Pacific Northwest. Haulers are finding it more difficult to find a home for some of the milk, pushing discounts for spot loads down to $7 below Class IV. There are even some reports of milk being shipped out to feeder operations for as little as $4/cwt. This could add to financial stress for dairy operations affected.

Cream is abundant and at low cost across the U.S. Butter makers are running full schedules, clearing much of the production into cold storage for later use. Inventories are building.

Dry whey is in better shape, with inventories currently in balance. Demand has been affected by the coronavirus, but demand is still steady to strong domestically, while export interest is still present.

Cheese output across the country has increased along with milk availability, with most manufacturers running near capacity. However, some plants are trying to limit output to keep inventories from growing. Export demand is mixed as virus fears continue to keep buyers on the sidelines.

With the additional milk available, shaky demand and increased output, both cheese and butter stocks have risen in the latest cold storage update. Over the period 02/01 through 02/24, butter stocks at USDA-selected warehouses increased 12% (7.6 million lbs) while cheese stocks were up 6$ (4.3 million lbs).

USDA released a Cold Storage Report this week. Butter stocks at the end of January were 15% higher than a year ago and jumped 28% from Dec.

American cheese stocks, however,  were down 3% YoY over the same period.

Going forward, it’s still hard to say how nasty the Coronavirus will end up being, but there is no doubt it will have affected economic growth globally. Car sales in China dropped 92% the first half of February and there are serious concerns over whether the Olympic Games, scheduled for July in Japan, will be able to be held. Coronavirus is causing major disruption, but we’re wondering if part of it is due to a sensationalist news media. So far in the U.S., the 2019-2020 influenza has caused 14,000 deaths, according to estimates from the CDC, yet globally, the coronavirus has caused under 3,000 deaths. That’s not to say it can’t move from an epidemic to a pandemic, but the markets, from stocks to commodities, may be over-reacting. If and when the number of new infections begins to decline, we believe we’ll see a fierce rebound across the board. Producers with milk already hedged at higher prices should consider buying call options July-Dec to protect their upside risk. Operations still needing to hedge could also buy courage calls to sell in to once the market rebounds. Price action on Friday was strong, despite little activity in the spot market. NDM futures were solidly higher, even as spot NDM declined. We could be putting in a long-term bottom here. Take some action before this opportunity is gone!