12/18/2020
It was fun while it lasted. This week we had a big run up on the class III price hitting with several months hitting $18. Then Thursday showed up to knock the wind out of our sails and bring us back down to reality. Most of the push higher was from the stimulus talks and the possibility of further buying by the USDA. Global Dairy Trade also moved higher this week with cheese pushing up 4.2 percent. Finally, pizza sales have been good and end users have been buying to avoid a price jump if the USDA steps back in. This is all tempered by the milk production report and a 3 percent jump in milk production from last year.
Spot Market Recap
Futures Recap
Cheese: Northeast has strong milk production with plenty of cheese on hand for spot/contact demand. Food service sales are down as COVID restricts operations. In the Midwest, demand remains steady as pizza style buyers return to the market. Spot milk is widely available and offers remain well under Class. In the West, production is active and inventories are more then enough to meet demand. Processors are holding back on production schedules to keep inventories manageable as schools let out for winter break and the food service demand diminishes. Over all this has created a weaker tone with the exception of pizza style cheese sales. There are some buyers picking up extra loads but at the bottom of the price range.
Dry whey prices have held strong even with ample supply of milk for Class III production. Plant managers have curbed growing inventories by taking off one or more days per week when typically they would be running at active schedules. The Animal feed whey prices also saw a tick up. International demand for whey has been good and extra spot loads are hard to find. This has been a lift to the Class III price.
Butter production shows no sign of slowing across the nations. Retail demand is good but food service orders have slowed. Processors are trying to lighten up inventories before the end of the year which has driven down the price. This week saw the CME Group’s Grade AA butter spot price at $1.4550 which is down 2.5 cents from last week.
Finally, the milk production report was out this week and was up 3.0 percent which is the biggest jump we have had this year. Cow numbers also jumped and were up 12,000 from last month and 62,000 from last year. There have been some predictions that milk production was going in that direction but these are some big numbers.
Corn prices moved higher this week. Lower US dollar give room for more corn exports. China appears ready to buy US corn in significant quantities to further tighten our Carry out inventory. The Brazilian corn crop is likely to encounter some adverse weather adding to already smaller world supply. March corn closed today at 4.37 for some upside protection consider buying the 450/500 march bull call spread for 9 cents. This will help with feed cost thru the first quarter. Risk 9 cents for a potential of 50 cents per bushel gain.
We had some big swings this week in the milk market and there is a lot to digest including a 3 percent production jump that, in a normal year, is enough to overwhelm the market. There is also COVID still restricting demand from restaurants and holiday parties. This all points to lower prices, but the latest stimulus bill which is still being hashed out could drive the prices right back up; If it passes, if there is money allocated for Ag, and if they decide to spend it on a food box program or something similar. That is a lot of ifs which has one thing going for it: the food box program is popular on both sides of the isle.
All the volatility this week in the futures market has made options very expensive. I would lean toward option spreads or risk reversals. Any time you put a cap on your milk you need to be aware of the risk of margin calls in the event the market moves against your positions. Give your hedge professional a call and discuss what is best for your operation.
With the shorten week next week for the Christmas Holiday we will not have a report next week. From everyone at KDM Trading have a safe and happy holiday.
