The KDM Dairy Report 05/15/2020


Houston, we have lift off! The spot block/barrel average just made its largest one-week gain in history (as far as we can tell!), and the result was some equally historic volatility. Though bidders were jumping in front of each other, just 5 loads of blocks and 15 loads of barrels exchanged hands, as sellers appeared content to hang on to product. Sellers of butter were a little more generous, letting go of 39 loads, but buyers still managed to the price up to levels not seen since late March.

Spot Market Recap
Futures Recap

There were no major dairy USDA reports this week, nor were there any new major news headlines, and yet, when the dust settled, June Class III futures finished with an astonishing, and record-breaking one-week gain of $3.17/cwt. This is unprecedented volatility. Let’s be clear. This market is about two things only. One, the government is on a dairy spending spree, sending the cheese market from a bearish stance, into a buy now, we want it yesterday, bullish, frothy frenzy. And two, states are opening up.

Dairy Market News reported this week that sales are continuing to improve, particularly food service. Milk output across the country is generally trending lower now, with the exception of the Pacific Northwest. Combine lower milk output, improved demand and Big Brother buying and suddenly surplus cheese stocks don’t look so bearish. The biggest question now is how long will it last? No one really has a clue, which was reflected in today’s price action. Sure, the government is expected to continue incentivizing dairy purchases for the next 3 months, but today we saw the June contract go limit up shortly into the overnight session, then make a massive drop, only to go limit up and settle there. Meanwhile, deferred contracts were strong overnight, only to hit heavy selling in the afternoon. Overall, all Class III contracts finished higher for the week, but we’ve never seen a daily settlement in the same commodity finish both limit up and limit down. June cheese futures settled at $1.79/lb today. This implies a Class III price of about $17.10, while current spot prices work out to about $16.72 Class III w/o basis. Either way, if cheese prices hold or move higher, June Class III could see further upside. But be warned. Trading this market is treacherous right now. Spreads as wide as 80 cents between bid and offer were seen in some contracts further out.

Last week (and for weeks prior actually), we’ve been recommending getting upside coverage in place. Those call options got a whole lot more expensive this week. Dairy operations were given a golden opportunity to hedge some milk this week, with the August contract hitting $18.03 for a high and Sep-Oct both in the upper $17’s. We haven’t seen those levels in a long time. Producers may want to consider getting unsold milk covered in Q4 if we see any decent price rally next week.

Overall, it appears wild volatility will be with us for a while. That should provide great hedging opportunities.

Have a great weekend!