The KDM Dairy Report 07/31/2020


Losses in spot cheese accelerated this week as buyers made only feeble attempts to stem the momentum lower. The record spread between the block and barrel price has been corrected, with blocks actually at a discount to barrels on Wed-Thur. Butter recorded the heaviest volume at 31 loads, while dry whey scratched out a small gain.

Spot Market Recap

Referring to the chart below, it looks to us as if the prior gap higher in the blocks (circled area), on the way to its record-setting run, is now very close to being closed. Gaps in charts often serve as magnets and are very often closed before the next move. Technically, the prior high back in July which served as resistance, should now offer some support (the red line), close to the $2.20/lb level.

Futures Recap

Everyone wants to know if the party is over after a fairly brutal sell-off in the front months this week. As spot prices fell, what often becomes a self-fulfilling prophecy is buyers sitting on the sidelines, waiting to see how low prices will go. And who can blame them? Unless you have an absolute short-term need for cheese, why not wait to get the best deal you can? We’re seeing two sides to the issue this week. On the one hand, recent record high cheese prices have resulted in increased push-back by buyers. It’s entirely reasonable to suggest prices may have swung to far to the upside. Even current prices are not competitive internationally, hurting exports. On the other hand, Dairy Market News reports cheese demand is healthy, with inventories largely in balance in the East and West, but both block and barrel availability in the Midwest is described as, “tight to nonexistent”.

With the third round of the Food Box program still in play, we would expect spot cheese buying interest to pick up the closer we get to the $2.00 level. That makes the August Class III contract particularly interesting. The first week of the calculation will likely come in at over $24/cwt, with this week coming in closer to $23/cwt. With current spot prices working out to about $21.25 and the first half of the calculation locked in at about $23.50, spot cheese prices are going to have to decline much further to cause a settlement near today’s close of $21.03. Maybe that happens, but our bias is towards a greater upside risk for this contract. After a limit down settlement on Wednesday, expanded limits on Thursday saw August Class III futures down just over $1.00 intraday, to a low of $20.13 at the height of panic selling. However, that extreme low appears to have been rejected with a Thursday settlement of $20.80, fully 77¢ above the low of the day, with a 23¢ higher settlement to $21.03 on Friday. If spot cheese prices can carve out a bottom next week, August is a buy in our opinion, due to its discount to spot and pricing already factored.

This could be an opportunity for producers to get coverage Sep-Dec and into 2021. Consider taking risk-protective action if these months see a substantial rally next week. Current wrangling between political parties this close to the election could mean little more aid is doled out. Extended unemployment benefits just expired and there is no sign of a further Ag aid bill, so when this latest round of the Food Box program is over, that could be it for a while.

Meantime, producers have been culling far fewer cows and production will begin to pick up, even as full fall school re-openings are in question, college and pro sporting events feature empty stadiums and the economy continues to struggle. There is real downside risk Sep on out. Get something done.

Have a great weekend!