06/05/2020
What a wild couple weeks it has been! Block cheese traded from a 13-year low to a new all-time record high in the span of 45 trading days. Unprecedented! Spot cheese continued it’s rampage higher this week, with butter deciding to join the party. Despite coming off a high just north of $2/lb, the weekly gain was still solidly green.
Spot Market Recap
Futures Recap
So what’s going on? We see four main drivers:
1.) Retail sales have remained elevated, even after states have begun reopening.
2.) Foodservice sales are suddenly recovering as restaurants begin refilling their coolers
3.) Government spending on dairy for Food Box and other programs has jump-started demand
4.) Many dairy operations in the East and Southwest cut their production/herd 10-20% to comply with coop policies.
As a result, we’ve had a complete flip-flop in both supply and demand from the dark days of despair in mid-April. Dairy Market News reports milk is tight to in balance everywhere in the country, with maybe the exception of the Pacific Northwest. Cheese inventories in the NE are low. Some Midwest operations are falling behind orders or flat out turning them down due to lack of capacity. Even in the West, blocks are tight and buyers are scouring the country for fresh cheese, with most coming up empty. As spot markets have galloped higher, $3 cheese has suddenly come up in conversations. The tighter milk supply also has spot loads of milk now selling premium to Class and has also tightened up the cream supply. Finally, it also appears that the export markets are picking up. The U.S. Dairy Export Council reported April dairy exports were up 7% vs. a year ago, with shipments to Southeast Asia jumping 35%.
While it’s tempting to get all giddy over the bullish news, we’d be cautious. The market is thin, spreads between bid/offers can be wide, and the slightest hint of weakness is causing amplified moves. For example, a single barrel offer in today’s spot market saw both the Jun and Jul contracts plunge 60+ points in the red, until a block bid showed up and eased nerves. Even so, June settled the day down 33 to 19.80. Current spot prices work out to about $23.66/cwt Class III. With June heading into it’s final 10 days of pricing, futures are still at a large discount to spot. It could be that there’s a belief weekly USDA survey numbers will never catch up to spot – we’ll all know in a couple weeks.
The Dairy Products Report was released this week but it didn’t seem to impact anything but NDM. Manufacturer’s stocks at the end of April were up 41% compared to last year. That put a drag on NDM futures. But butter output was up 25% vs. a year ago to a record high, and it didn’t seem to matter.
Butter futures were limit up at times, with weekly gains in some contracts nearing 15-20 cents.
It’s pretty difficult to know where we go from here. Today’s session felt more like profit-taking before the weekend after several days in a row of higher markets. Fundamentals appear very bullish in the near term, but we would expect some time of retracement lower over the next week or two as foodservice operations complete their first wave of purchases. That doesn’t mean the bull market is over, but record-high cheese prices tend not to stay there very long. July Class III seems to be the most vulnerable. Consider grabbing some PUT options is you want to stay open, or consider the 18.00 x 20.00 fence for net premium of zero. That will give you a floor price of 18.00 but profits would be capped at 20.00. So some basic sales July-Sep might not be a bad idea. Q4 seems hard to sell under $17, but who knows, the current signals are telling producers to make as much milk as possible, and there is no incentive now to cull aggressively. Expect cow numbers to start creeping up and at a faster rate in the months to come.
Have a great weekend!
