June 3, 2020

Cheese Prices: Is There A Top?

 |  By: Robin Schmahl

The incredible rise of cheese prices is one for the record books. What makes it more incredible is that it has happened during a world pandemic and record unemployment in the U.S. One thing that fueled the rise of cheese prices was the Farm-to-Families Food Box program when it was announced that purchasing for this program would begin the following week. Cheese prices increased and have never looked back. 

What made this interesting is that the plants that were awarded the contracts for supplying milk and dairy products to this program are not ones that purchase cheese on the daily spot market. Thus, buying cheese for the food program did not come to the CME spot market directly. Indirectly, the greater demand for dairy products for the Farm-to-Families Food Box program would remove some of the products that would otherwise be available for retail or food service industry outlets. Any area of improvement in demand distribution of dairy products is positive to the market. 

However, there has been some question as to how much the dairy products purchased for this program have offset what might normally have been purchased anyway. Much of it likely has been and will be distributed to those who are in need and would not be able to purchase certain dairy products due to the loss of jobs. It was a necessary program to aid those in need during this time of record unemployment. Utilizing the plentiful supplies of dairy products provides nutritional products to those in need. It certainly is much better than dumping the milk. But some of it would have be purchased anyway. The total impact will be difficult to quantify. 

It certainly has resulted in a meteoric increase of cheese and butter prices. On Friday, May 29th, block cheese price moved to the highest level since October 22, 2014. This has propelled milk futures substantially higher in the June and July contracts. If June Class III futures can hold, milk prices will gain nearly $7.00 per cwt from May. This would result in a Class III price that would be the highest since December 2019. 

Farmers that were on the verge of throwing in the towel and getting out of the business are now reconsidering due to the abrupt change of the market. It may end up being a good year after all. However, we must not get complacent as sharp rises in spot prices have eventually resulted in a sharp drop as demand is impacted. The rise of futures prices are providing an opportunity to protect prices that may be above the cost of production. Those that are in business and want to remain in business need to utilize hedging strategies to protect those prices while allowing for flexibility. Option strategies and Dairy Revenue Protection insurance can work well to accomplish your goals while at the same time leaving the potential to take advantage of the upside.