09/18/2020
Blocks went ballistic this week as news of a government solicitation for 48.4 million lbs of process cheese on Thursday was followed by news that a 3rd round of the Food Box program would be funded to the tune of $1 billion. Blocks ripped 46.25 cents higher on just 9 trades, while barrel cheese was only able to gain 4 cents on 11 trades. The current block/barrel spread widened even further, obliterating the previous record along the way; actually nearly doubling it! To put the current spread in perspective, see the 20-year graph below. How long can this last?
Spot Market Recap
If it weren’t for blocks stealing the spotlight, butter would have been the star, gaining momentum to the upside in the face of large inventories and picking up nearly 12 cents. Buyers must have sensed a bottom was in as they grabbed an astonishing 69 loads for the week. Meanwhile, NDM continues to push further above the $1 level with a solid week, but dry whey has yet to catch much interest.
Futures Recap
There’s nothing quite like a government announcement to distort the normal fundamental drivers of supply and demand. Our remaining targets to market some Nov milk at $18 and Dec at $17.50 both hit this week, with all appearances indicating this rally isn’t over. But just a couple weeks ago, things looked a whole lot different. Consider where prices might be today without government intervention, while digesting the information released this week.
U.S. Milk Production in August increased 1.8% compared to a year ago, while the dairy herd is 42,000 head larger. At 9.36 million head, the size of the herd was unchanged from July, but that was only because USDA revised July cow numbers higher, in addition to revising July milk production from a 1.4% gain to a 2.0% gain. Milk per cow in August increased 27 lbs compared to 2019.
Slaughter numbers continue to drag, with 18 consecutive weeks of significantly lower cull numbers. Dairy Market News reports milk is generally available throughout the country, with the southeast being the exception. Barrel cheese is becoming more available in the Midwest and West. Plenty of cream is available for making butter as ice cream demand winds down. Finally, a new cheese plant in Michigan, capable of processing 8 million lbs of milk/day, is scheduled to come online soon.
But……..
The international picture is improving. This week’s GDT auction saw the Dairy Price Index increase a solid 3.6%, led by an 8.4% jump in SMP and 7.2% gain in Cheddar cheese.
Dairy Market News reports internal EU demand for sliced cheese is very good, and coupled with the hit to milk output during the recent heat wave in Germany and France, it’s led to tighter cheese supplies. South of the U.S. border, interest from Mexico for NDM is notably more active this week. And then there’s the government programs.
Last week we stated short-term momentum was to the upside and again addressed how the block/barrel spread might be closed with a tighter block supply. So far we’ve been right on the upside call, but the spread has widened even further. Interesting to note, while Nov Class III futures finished limit up today, Oct Class III settled “just” 53 cents higher, even though it begins its pricing period Monday, and current spot prices plugged in to the calculator yield a $20.27 Class III price, not including any basis. Is that a caution flag that the current government action will be a very short-lived stimulus to demand? It’s hard to say. Technically, we had a strong move higher, with Nov Class III putting in a new “life of contract” high today. Being that we settled limit up, we’d expect some further upside at the open Sunday evening. For hedgers, this upside volatility is a gift opportunity to get some milk sold at higher prices. Don’t be complacent, expecting these high prices to stay. We would now turn our focus on to what can be done in 2021, especially Q1 if it sees a strong move higher. Or consider the entire year, which settled at $16.59 and is threatening its previous average high of $16.72 set last February. Would you sell all of 2021 at a $17 average? Should you at least have an order in place for 20-25% of your milk there?
Have a great weekend!
