10/02/2020
Barrel buyers finally responded to last week’s government solicitation and bid prices up nearly 30ยข, while only securing 12 loads. Meanwhile, block cheese saw a modest gain, while NDM continued to march higher on decent volume.
Spot Market Recap
Futures Recap
Prior government solicitations for the various phases of the popular Food Box program have resulted in near instant limit moves, followed by further limit moves. Not so in our latest example. It a week ago Thursday that the latest Section 32 solicitation was released, with the government looking for 44 million lbs of barrel cheese. Class III futures did respond that evening, but not spectacularly. However, as barrels continued to see a bid each spot session, along with a few block bids, Class III futures finally started to gain momentum. Oct Class IIIs, well in to their calculation period, continue to trade a discount to current spot prices, which work out to about $21.75. Forced to catch up both Oct and Nov futures saw the largest gains on the week, with most of the 2021 contracts hardly moving at all. The strong move up front, however, pushed Q4 contracts into new life of contract highs, settling at an average $19.09 today (see chart below).
In our opinion, the market is setting up for a fall; it’s just a question of when.
Dairy Market News reports milk is plentiful in the Northeast, with large volumes heading into balancing operations and cheese plants. In the Central region, milk output is similar to previous weeks, though spot loads ranged from even to $1.50 over Class. Heading west, California milk output is in balance with buyers’ needs, though some processing plants are running a little below full capacity. Cooler temps in Arizona are helping cow comfort, with milk in good balance with demand. Output has increased in New Mexico, keeping processors running at full capacities. In the Pacific Northwest, milk output is strong in the mountain states, steady elsewhere, but overall the milk supply is plentiful with manufacturers running on full schedules. Some milk is being discounted to find a home.
Cheese is moving well on healthy sales and good demand for pizza varieties. Barrel producers report they have some extra inventory, but not at concerning levels. Blocks are tighter. Industry contacts report the increase in government purchases is impacting cheese prices. U.S. cheese is now not as competitive in the international market.
In the short term, we would expect barrel bidders to persist in to next week. That should bode well for Oct-Nov futures. Technically, pushing in to new contracts highs is also short-term bullish. Since none of us know when this latest party will be over, hedgers should continue to take on protection Nov-Jun ’21. The first quarter of 2021 settled at $16.68 today; consider sales if we approach $17, which is likely to attract more selling.
In the mean time, be prepared for more volatility ahead.
Have a great weekend!
