volatility
February 7, 2019

How Long Can Class IV Stay Above Class III?

 |  By: Mike Opperman

pricesIn normal years, Class III prices are higher than Class IV, but since October 2018 those prices have been inverted. Here’s why:

  • There is a mountain of cheese in inventory. The U.S. is sitting on 1.4 billion pounds of cheese, the most in storage in history. Changing consumer preferences is part of the reason for the burgeoning supply.

“What has changed, and changed fairly noticeably and fairly recently, is people are turning away from processed cheese,” says Andrew Novakovic, a professor of agricultural economics at Cornell University. “It’s also the case that we’re seeing increased sales of kind of more exotic, specialty, European-style cheese. Some of those are made in the U.S., a lot of them aren’t.”

The historical supply of cheese has had a negative impact on cheese prices. Class III prices are based on the price of cheese, dry whey and butter. Whey and butter prices have been strong, so the drop in Class III prices can be attributed mostly to the fall off in cheese prices. 

“It’s the accumulation of past imbalances,” says Nate Donnay, director of dairy market insight with INTL FCStone. “It isn’t so much that the large inventory itself has pushed down prices, the inventory is the result of production exceeding consumption during past months.”

  • powder stocksPowder supplies have dwindled. Intervention stocks in the European Union (EU) we at historical highs in mid-2016, but now are at less than 5,000 metric tons. As a result of the inventory reduction, global prices for skim milk powder have gone from 89 cents per pound on December 4, 2018 to $1.09 per pound at the last auction on January 15. CME spot prices for nonfat dry milk (NFDM) have followed the same trend.

The rise in powder prices have had a direct impact on Class IV prices, which are based off of NFDM and butter prices. 

So how long can this price inversion last? First, don’t expect cheese prices to come up anytime soon.

“The barrel cheese inventory is very heavy,” says Mike North, president of Commodity Risk Management. “And buyers aren’t motivated to buy. This isn’t a period of high demand, so they can lay low. Some are putting up a few bids here and there but there isn’t a rush to get into the market in a strong way.” 

On the powder side, exports were heavy out of the EU and New Zealand at the end of 2018. Those orders were for shipment in January when quota starts to kick in. “The question is, was that activity temporary or longer term?” North says. “We’ll see what the impact of having the weight of the EU intervention off the market does to prices.” He says he’s more inclined to see NFDM prices in the $1.10 to $1.20 per pound area, which is about where the market is now. 

With cheese prices staying relatively low, producers in the Midwest and East, which are heavy Class III areas, won’t see much price recovery in the near term. But as powder prices plateau but remain at relatively high levels, producers in Class IV areas in the Southwest and Michigan will continue to see better milk checks.  

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