Bullish Attitudes May Be Changing
The relationship between cheese prices and Class III futures has been interesting to say the least. It is the job of front-month futures to converge to cash which has resulted in June falling about 65 cents from its high set in mid-May. Underlying cash has not performed quite as expected and futures have declined steadily over the past 1 1/2 weeks. By the middle of the month, the contracts should flat-line until the price announcement is made adjusting only from changes in the weekly Agricultural Marketing Service prices.
Block cheese price is near the bottom of the trading range and has been since early April with barrel prices at the lowest level since the end of April. However, most milk futures contracts had been increasing steadily. July through September milk futures have shown the most gain and are near the highs. The weakening of cheese prices has had little or no impact on these contracts due to the bullish attitude being held in the market. Traders anticipated milk supplies to tighten as the year progressed due to farms going out of business and cows moving to slaughter. The later has and is taking place, but milk supply has not yet tightened.
There is indication of cow numbers beginning to decline on a month-to-month basis, but not yet on a year-over-year basis. However, that could come to fruition if the trend continues. Cow numbers on the April Milk Production report totaled 9.40 million head compared to 9.392 million head for April 2017. The trend of increasing cow numbers is slowing with only 8,000 head more than the previous year. A few more months of reduced cow numbers could result in national herd numbers running below the previous year which we have not seen for quite some time.
Traders are showing some concern that milk supply may not tighten as much as earlier anticipated. This is being reflected recently in Class III futures as October and later contracts have been trending lower over the past two weeks. Price premium is being taken out of the market and will continue to erode unless the market proves itself. As long as cheese prices remain choppy and milk supply remains sufficient for demand, later contracts will continue to erode as they converge to cash.
If the trend of decreasing fluid milk consumption continues, there will be sufficient milk available for other areas of manufacturing.
It is interesting that Dean Foods notified about 100 patrons three months ago that it would not pick up their milk as of June 1st. They cited decreasing fluid milk consumption as part of the problem. The other issue seems to have been Walmart moving into the bottling space by bottling their own milk. Dean Foods was a supplier to Walmart and lost that business as Walmart decided to package milk in-house. It makes one wonder why Dean Foods needed to eliminate those farmers rather than being able to supply the raw milk to Walmart. Walmart needs the milk for bottling and they need to obtain it from somewhere. It should be circular due to the same or similar demand being met with only a change of processing hands. One wonders if there was something else involved in this issue.
Recently, Dean Foods announced the closing of two more plants; Meadow Brook Dairy in Erie, Pennsylvania and Garelick Farms in Lynn, Massachusetts. It is rumored that they will be closing seven more plants in the near future as eluded to by a statement from the company. Again, the reason is the continued reduction of fluid milk consumption. The company is, however, looking for other options for business growth and that is the alternative milk business. Somehow that just does not sit well with many. There is potential for growth in dairy through innovation, but alternative milk products are gaining market share and is seen by the company as a way for profitability and growth. Beverages can be manufactured from anything that can be squeezed or processed and unfortunately, any fluid that is white can be labeled milk.