The KDM Dairy Report 1/22/2021


It was fun while it lasted.  This week took another sharp drop in the cheese market after disappointing numbers from the first round of buying in the latest Food Box program.  Block price dropped an additional 22 cents and the barrels gave up 18 cents.  This perpetuated a drop (in the February class III futures) of almost 3 dollars from last week.  Have we hit a bottom?  The futures seem to think so with February at a premium to cash and starting to price.  Current class III cash is at 15.19.

Spot Market Recap
Futures Recap

Cheese: In the Northeastern region milk is widely available for class III operations as plants run at full capacities.  Inventory levels are steadily increasing, even with cheese orders picking up.  Retail cheese sales are moderate, but food service continues to have softer demand.  In the Midwestern region, milk is readily available for cheese makers, reports of spot milk prices as low as $8.50 under Class.  Curd producers say restaurant orders moved higher this week, which has not been seen in months.  Government contracts will put a good dent in the growing inventories which should bring them into balance for the time being.  In the Western region there is more than enough milk for cheese production to run at full schedules.  The Food Box program created an initial price push upwards, but dropped back down this week.  Food service and institutional demand is weak.  Retail demand is above last year but not enough offset the reduction in cheese sales from other channels.

Dry whey  prices have shifted higher across the board.  Export interest is firm and there are no discounts to be had.  Production is busy and there are no spot loads available.  Animal feed whey trading has slowed after an active couple of weeks, but prices remain unchanged.  Overall the market has a bullish tone.

Butter: Churns were busy this week with plenty of milk for active production schedules.  Butter interest has declined after the holidays and inventories are steadily building.  The government contracts have help lift butter prices to $1.4025, up more then eleven cents from last Friday.

Corn has moved lower for 4 days, with March corn finishing the week today at 5.03.  The correction, though significant, still is holding above key technical support levels, which for March corn is at 4.93.  Consider buying the 4.80 March put and buying May corn.  The put will give you downside protection for 30 days without paying for time value of a May put, and the futures position will let you ride the market higher in anticipation of a return to the prices before this last drop.

The hot air was really let out of the balloon this week as the market was disappointed with the amount of dairy buying that this latest round of Food Box program had in it.  With the amount of milk we are producing currently, we are going to need several more rounds of government buying to hold future prices.  There is insignificant non-governmental demand to absorb all the dairy we are producing across the country.  So the question is how much and when the government is going to buy.  We should see rallies each time the USDA makes an announcement about purchases, and I would recommend taking advantage of these to ether sell or buy puts.  On the pull backs, look to buy calls or call spreads to help offset hedges.  If we can help, please give us a call.