markets
July 3, 2020

Markets Create Advantages and Disadvantages

 |  By: Robin Schmahl

The first half of the year certainly has not lacked of volatility. Block cheese price made new record highs. Class III price made a record price increase from May to June of $8.90 per cwt. Some believe cheese prices may remain strong for an extended period of time due to milk production running lower than last year. Some plants required patrons to reduce milk production from 10-20 percent depending on the plant. This along with a seasonal decrease of milk production has provided support under the market. 

Demand for fresh cheese has increased as the food service industry began operating at an increased level once states began the reopening process. Cheddar cheese production slowed during the two months during which there was a substantial decline of demand. Order surged both from government purchases for food programs as well as increasing orders from the food service industry, only to find less that desired supply of fresh cheese. Buyers turned to the daily cash market to obtain supply only to find a void of product requiring buyers to bid higher in order to find a level at which sellers will sell product. 

Over the past weeks, cheese production has increased due to strong demand and high price. However, increased production has not overwhelmed the market. Continued high cheese prices will eventually result in higher supply and potential lower prices. The job of the market is to either reduce demand with higher price or to increase demand with lower price. Cheddar cheese price substantially higher than world price is having an impact on exports. This disparity has opening the door for more cheese imports. The first four months of this year showed imports of dairy products to the United States varying greatly from a year from the same period of time last year.  For example, whole milk powder imports have increased by 165.4% to just over 10 tons offsetting some of the increase of exports which have been 32.4% higher at 13,456 tons. The amount of imports relative to exports does not sound like a lot, but the fact that they increased so much is reflective of what happens as a result of higher prices.  Imports of Anhydrous Milk Fat grew by almost 50% for the year.  American butter, cheese and anhydrous milk fat have been holding prices well above the global average, motivating buyers to purchase foreign products at a lower price.  

A record with spread between Class III and Class IV prices. This is the result of a substantially lower butter price in relationship to cheese prices.  According to current futures contracts, this wide spread could remain for an extended period of time. Generally, butter and cheese prices are closer together with butter being higher than cheese many times. This keeps a nice balance between Class III and Class IV milk. We know that this spread will move back together again. The greater possibility is that cheese prices will decline and move close to butter.