January 13, 2020

Unprecedented Block/Barrel Price Swings

 |  By: Robin Schmahl

Class III milk futures were under substantial pressure during the first half of December and have since basically traded in a sideways pattern. January’s milk checks will be significantly lower than they were in December. The positive aspect is that milk prices will be significantly higher than a year ago. January’s Class III price for January 2019 was $13.96 compared to a projected Class III price of about $17.00. The January price can change somewhat until the final price on February 5th, but the change from now until that time might be limited. Once the front-month contract nears the half way point of the month, it is virtually priced by the trade with futures generally flat-lining until price is finalized. Thus, where futures prices are by the end of the week will be about where they will be for the month. Class IV futures are around $16.80 and if realized, will be over $1.00 higher than a year ago. These are not fantastic, but the trend is headed in the right direction. 

The USDA projects better milk prices on the World Agricultural Supply and Demand report they released on January 10th. They estimate Class III prices to average $17.35 this year compared to $16.96 in 2019. Class IV is estimated to average $16.90 this year compared to $16.30 last year. The All-milk price is estimated at $19.25 compared to an average of $18.60 in 2019. These prices are substantially better than 2018. So, prices are moving in the right direction.

There has certainly been some volatility in spot cheese prices and Class III milk futures. However, the real volatility has been in the block/barrel spread. We have seen for a few years now that the so called “normal” block/barrel spread of 3-4 cents seems to be a thing of the past. There have been times during which barrel price has been quite a bit below blocks and at other time above blocks. It seems to be more normal that the spread has been wider. 

The block/barrels spread have been very volatile with unprecedented swings since September. On September 23, 2019, blocks were 43 1/4 cents above barrels due to burdensome barrel cheese supply. However, supply changed quickly resulting in barrel price moving to a 37 1/2 cents premium above blocks on November 12, 2019. Barrels were in tight supply with manufacturers having a difficult time filling orders. On Friday, January 10, 2020 the block/barrel spread was 34 3/4 cents in favor of blocks again. The idea that a wide block and barrel spread will not last very long as the industry likes the spread to be at the once upon a time normal 3-4 cents is certainly a thing of the past. 

Manufacturers so not seem to have the capability they once had of being able to switch from block cheese production to barrel cheese production and vice versa as they once did. They have developed markets and have changed plants to be efficient in production for those markets. This has reduced the ability of plants to switch back and forth resulting in greater spread price swings as supply and demand changes for each category. 

There is a certain amount of contentment that seems to have developed with dairy farmers. They do not like it that milk prices are not as good as they had been at the end of 2019, but are satisfied with projected milk prices seen on the futures market. They have tightened their belts during the low prices over the previous 4 1/2 years and do not seem to think these prices are all that bad.  Projected cash flows have been made for 2020 and an improvement is seen. However, being complacent is never an option when it comes to milk prices. It is a long year and even though there are some expectations for higher milk prices later in the year, there is significantly risk during the first half of the year as milk production continues to outpace last year. Marketing needs to be an integral part of your business plan.