The KDM Dairy Report 04/17/2020


Spot cheese prices were held firmly in check near the $1 level this week, and both butter and NDM gave up further ground. However, spot dry whey has been making a steady climb as of late and is now right up against long-term resistance near the 40-cent level (see graph below).

Spot Market Recap
Futures Recap
Responding to weaker spot prices and active producer selling, most dairy futures finished the week solidly lower, with the exception of dry whey futures. Despite widespread dumping of milk, the loss in cheese demand from restaurants is leaving plants no choice but to slow output. This in turn is tightening the dry whey supply. Dairy Market News reports cheese inventories are continuing to grow, and there is concern about running out of storage space. Spot loads of milk are available at steep discounts; $6-8 under Class reported in the Midwest. Regionally, cheese makers in the East and Midwest seem to be in rougher shape than the West, where strong retail demand has inventories there described as “tight to balanced”. Butter is in a rough situation as well. Normally at this time of year, ice cream manufacturing would be ramping up with the warmer weather in the south, competing with butter for cream. Not so this year with much of the country will staying at home. As a result, cream supplies are “copious” across the nation, with butter plants trying to process as much as they can. But butter sales remain sluggish while sit-down restaurants remain closed. Milk output across the country continues to increase seasonally, but changes may be on the horizon. We heard through contacts this week that DFA would be imposing a 15% reduction in the milk supply for Eastern producers, while Select Milk would be pushing a 10% reduction on farms that ship to them. More cows are going to slaughter and being dried off.
Finally, there’s growing unrest around the country over the necessity of “safer at home” policies, and a “one size fits all” implementation for both rural and urban populations. Protestors in Michigan organized a rally at that state’s capital this week, while there was a nearly audible uproar in Wisconsin (and planned rally) when its governor announced an extension to May 26th for its “stay home” directive. On a national level, the Trump administration is promoting a gradual re-open of the country, but leaving it up to individual states to make final decisions. And the stock market had a strong day on Friday as hope grew on a promising new treatment of the Coronavirus.
Whether it was some end-of-week profit taking or a response to the possibility of a quicker return to normality, Class III futures popped higher in the latter part of today’s trading session. The July-Dec Class III average now sits at a pivotal level, having settled at $15.25, The chart below shows this pack has now made a higher low. If it can continue higher and put in a higher high (above the previous high close to $16), it could be an indication that the lows are behind us.

Producers may want to consider upside risk insurance for these months on milk they have already sold. The current efforts to reduce the herd/milk output could result in a sudden shortage should demand see even a reasonable recovery from current levels. A multi-dollar move higher is a possibility. Selling out of the money put options and using the premium collected to buy call options would be one way to accomplish this.

On the feed side, grain markets have continued to move lower but at a slower rate. It may be wise for those producers who buy feed inputs to get some coverage. Lower ethanol production has taken a toll on corn demand, but also resulted in less DDG output, and inventories are shrinking. This is bolstering soybean meal prices.

Corn: Consider buying $3 Sep corn put options at 7¢ (contract size is 5,000 bushels, or 135 tons). Initially this will protect the value of your grain and silage corn you will be growing, but can also be used to cover downside risk if you decide to lock in with a physical purchase from your supplier.

Soybean meal: Use a similar strategy, buying your physical needs, then protecting against lower prices with an August meal put option. For example, you could place a buy order with your supplier at $275-280/ton, then buy the $280 put for $5/ton premium (100 tons per contract).

Call us if you need help offsetting some risk in either dairy or grains, or both!

Have a great weekend!