Are June Inventory Declines Unusual?
The June Cold Storage report showed a decrease of cheese inventories overall. This seems like an unusual event as generally it seems inventory increases though the first half of the year and then decreases the second half. We need to look back historically to see the frequency of this pattern.
June total cheese inventory has increased from May to June in 30 of the past 38 years, supporting the idea of a seasonal increase. However, eight of those years showed a decrease which renders an inventory decline not an unusual event. It is certainly positive to see a decline at this point with milk production running above a year ago.
Increasing export activity and the potential for continued strong exports brightens the outlook for demand and, in turn, milk prices. The caution is that total cheese inventory set a new record for the month of June. Over the past 15 months, there have been 14 of those months showing record inventories for the individual months, including the past seven consecutive.
Inventory cannot continue to increase without some impact on the overall market. The ideal situation will be for demand to improve requiring more inventories of cheese to be utilized thereby drawing down inventory without lower prices being required to do it. The market is on track to show higher inventory by the end of this year compared to last year if the current trend remains in place.
Butter, on the other hand, shows a bit different trend. Over the past 38 years, there have been 21 years when inventory increased while 17 years showed a decrease of inventory during the month of June, so the decline of inventory in June is less unusual for butter. Inventory below a year earlier certainly is supportive to the price of butter.
There have been two projections floating around recently concerning butter price through the rest of the year. One is that price could remain near current levels for the rest of the year while the other thought is that price will move above $3.00 before the year is finished. Recent spot price activity and the decline of inventory lends itself to the later. Comparisons are already being made to 2014 and 2015 when butter set new price records as demand increased and supplies decreased. With current tightness of butterfat on the world market, there could be significant export activity for a period of time drawing down inventory and tightening supply. Butter price is well-supported with limited downside price risk.
The key will be how cows will progress in milk production once hot summer weather is behind us. There were 78,000 more cows in June than a year ago. This could increase production significantly over a year ago if overall milk production increases seasonally through the later part of the year. This would keep sufficient milk available for demand, but likely would not push prices to substantially lower levels. There will be downside risk to prices if spot prices remain in the current range due to the need of futures to converge to cash.