The KDM Dairy Report 10/23/2020

10/23/2020

For the third week in a row, barrel prices rose much more than blocks, with the spread now down to 31¾¢, and now we might know why. Fresh blocks remain tight due to current government buying, but barrels have now tightened up a bit, as those plants that could, switched from barrel to block production due to higher returns. In addition, there has been a reluctance to over-produce cheese at these prices, as plants are wary of current prices and don’t want to be stuck with high-priced inventory. While cheese prices made gains this week, spot butter and powder lost ground.

Spot Market Recap

With the big gains in the spot barrel price the past few weeks, the block/barrel average now sits at $2.61/lb. Could it be set to challenge the high set this summer? It sure looks that way.

Futures Recap

You may recall last week we admitted to being mystified by the market, especially the spectacular gains in the December Class III contract, which continued again this week. Now we know. This afternoon USDA announced a new round 4 of the popular Food Box Program, authorizing $500 million for purchases of products to be delivered Nov 1st through Dec 31st. While the sum isn’t as large as previous rounds, it should go some way to keeping the cheese supply on the tighter side for the next several weeks. Seeing the market rally for a few weeks now though, it does give us pause that this information was “known” prior to general public release. It’s hard to imagine why the market should have been so strong otherwise.

Indeed, Tuesday’s Milk Production Report resulted in a strong sell-off Wednesday as September milk output in the U.S. was up a strong 2.3% compared to a year ago, and cow numbers increased 5,000 head from August (which was revised higher). The 2.3% increase is the largest monthly gain since March.

On Thursday the Livestock Slaughter Report was released, showing just under 250,000 dairy cows were removed from the milking herd, down 2.2% compared to last Sep. That said, it didn’t trail year-ago levels by as much as the last couple months. Perhaps the herd size is stabilizing a bit.

Thursday also saw the release of the Cold Storage Report. Butter stocks at the end of September was up 18% vs. last year, but down 7% from Aug. Total cheese stocks were little changed, down just 1% YoY and also down 1% from Aug. The one surprise was American cheese stocks, which were unchanged from a year ago, but down 2% (17 million lbs) from Aug. The typical Aug-Sep drawdown is about 2 million lbs. The current Food Box Programs is most likely the reason behind this, and also factors into current tightness.

In light of the government’s continued presence in our dairy markets, the bearish Milk Production Report was kicked to the curb after one day. These are not normal times, and we continue to emphasize that the government is severely skewing normal supply and demand signals. But for now, the market is always right, and this does present an opportunity for producers to get on some great hedges. Q1 raced to new life-of-contract highs, settling at $17.25 average. We would actively look at getting protection from here and higher, selling in increments along the way. No one knows when this will all end. Likewise, Jan-Jun settled at $16.92 avg, knocking on the door of the previous high of $17.11 set way back in February. Consider getting coverage over $17 avg for these months. As far as November is concerned, we’d leave it for now. Current spot prices work out to about $24.85 with the first week of the calculation in the books. With the next round of USDA buying announced today, it will
likely see continued support as it tries to close the gap with spot. Short term, December Class III looks to move higher as well, with government buying now leading into November. Consider hedging Dec in 50-cent increments above today’s settlement.

Sunday evening’s open should be wild. Hold on next week!

Have a great weekend!