unkown markets
November 7, 2016

Higher Prices Must be Supported by Higher Demand

 |  By: Robin Schmahl

Cheese prices have made an incredible increase in prices over the past two weeks. Cheese prices have increased 15% with blocks establishing a new high for the year and the highest level since November 2014. This has certainly improved the outlook for milk prices through the end of the year. The trend has changed for the time being with strong demand for the holidays. One can only hope this demand will remain. However, we must not become complacent believing that low prices are solidly behind us. Milk futures have been increasing in response to higher cheese prices, yet traders are exercising caution. Futures contracts in 2017 have shown improvement, but are lagging the meteoric rise of the closer months.

This price rally is reminiscent of what took place during the summer when demand for fresh cheese increased leaving little available to the spot market. Record cheese inventory was reported on the cold storage reports, but that did not matter. The daily CME group spot market trades cheese 30 days of age and younger. This cheese was in high demand with manufacturers having a difficult time filling orders. Thus, price continued to escalate peaking on August 19 before trending lower as strong demand for fresh cheese was filled allowing manufacturers to catch up and build supply. We are again seeing this take place moving price substantially higher. There is concern this will take place again once fresh cheese demand as well as overall demand slows once holiday orders are filled.

What may keep prices from falling back similarly to what we experienced earlier this year would be improving international demand. That certainly has the potential to improve now that Global Dairy Trade (GCT) auction prices have been improving. The latest GDT auction showed a trade weighted average increase of 11.4% moving butter price to $1.88 and cheddar cheese price to $1.51 per pound. U.S. and World cheddar cheese prices had been nearly the same price for a few trading events, but have now moved substantially apart again which is not helping to stimulate international interest. However, butter prices have come together helping the U.S. to become more competitive. This is providing some support to the market. Exports in September show signs of improvement. The Foreign Agricultural Service showed exporters shipped 155,885 tons of dairy products surpassing the previous year for the fourth consecutive month. If that does not get one excited about export potential, I don’t know what would. Cheese exports were one percent lower in September than they were a year ago. A big improvement was seen in butterfat exports for the month with an increase of 137% from a year ago. These two categories are certainly moving in the right direction. Cumulative cheese and butter exports are running behind last year by 15% and 7% respectively, but we can certainly count that as a victory. Nonfat dry milk/Skim milk powder exports have been strong most of the year and competitively priced. September exports were 10% above last year and substantially higher than 2 year ago. Cumulative exports are 5% above the same time last year.

World prices seem to on a steady rise which should translate into better U.S. prices for dairy products. However, there still is one caution that needs to be kept in mind and that is the record cheese inventories we still carry. If production and demand continue along the same pace as they currently are, we may close out this year with higher inventory than we closed out last year. This will give us a higher starting point in 2017 and the potential for again reaching new inventory records. This would be daunting in itself, but increasing domestic demand and international demand could slowly chip away at this wall of supply. That certainly would be preferable to low prices having to accomplish the task.

 

 

Upcoming reports:

 

  • World Agricultural Supply and Demand report on November 9
  • October Milk Production report on November 18
  • October Cold Storage report on November 22
  • October Livestock Slaughter report on November 23
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