July 4, 2016

Record Cheese Inventory and Higher Prices

 |  By: Robin Schmahl

Milk price outlook certainly has improved over the past few weeks. Strong seasonal cheese buying coupled with tightening supply of fresh cheese has pushed cheese to price levels last seen on November 11, 2015. This has been surprising given many of the current underlying fundamentals. Demand is good keeping product movement steady which keeps buyers actively looking for product to fill current orders as well as to increase ownership of supply for anticipated demand. Class III milk futures pushed higher with the September contract setting a new contract high at $17.12. This strength was not expected by the trade and caused many to debate the longevity of the strength.

Tightness had developed in the supply of fresh cheese requiring buyers be more aggressive to obtain supply to fill orders. This recent buying frenzy was not from those looking for supply to put into aging programs due to the abundance of that supply of cheese at the present time. In fact, other cheese and total cheese categories on the May Cold Storage report showed record inventory. American cheese stocks were at the highest level since November 1985. The cheese traded on the daily spot market is cheddar cheese which is 30 days old or less. This sets up the paradox we currently have. Huge inventory and supply of cheese is bearish, yet a tight fresh supply pushes price higher. We know this scenario cannot be sustained for an extended period of time.

The last time we had cheese inventories this high the government initiated the whole herd buyout which reduced cow numbers which, in turn, reduced inventory substantially over the following two years. We know the government will not do something like this again. There is also no provision for the purchase of dairy products due to the elimination of government support prices. It has been 30 years and inventory has again moved back to those levels while during the same time demand has increased substantially. The high level of inventory suggests buyers have purchased substantial amounts of cheese ahead of time for upcoming second half demand.

Cheese inventory may increase somewhat longer than usual this year as a result of slower exports and continuing strong milk production. The nation’s dairy herd is not declining even though milk prices have been low. Dairy cattle slaughter in May was 12,400 head lower than April and just 600 head above a year ago. Culling still is taking place mainly to make room for replacements and not to reduce mouths to feed. It may take lower milk prices over a longer period of time to reduce dairy cow numbers.

Many dairy farms – especially those who have expanded – are in the business for the long haul and are not so quick to cull cows or reduce the feeding of various feed stuffs that would result in lower milk production. They will run a tight ship and weather the storm in order to remain efficient. The only way many will go out of business is if they go bankrupt and are forced out. Making the decision to expand for personal reasons or to bring in a family member to the operation changes the whole landscape of things. The decision is a business decision made for the long haul.

Demand for dairy products needs to improve both domestically and internationally, but this may take some time to accomplish. Otherwise we could be in for an extended period of average to lower milk prices. 

Upcoming reports:

-May Dairy Products report on July 6

-California August Class I price on July 8

-World Agricultural Supply and Demand report on July 12