July 17, 2017

Usual Price Relationships Have Changed

 |  By: Robin Schmahl

There has been much discussion lately over the exceptionally wide block/barrel spread. This discussion stems from the old idea that the normal spread should be around 3-4 cents with blocks higher than barrels. In the past this has been true as efforts were to keep this spread reasonable. When the spread widened or inverted it did not take very long before it would return to the normal or near-normal spread.

However, that seems to have changed just like many other things have changed in the dairy industry over the past few years. Take for instance the pricing of butter in relation to cheese. Historically, butter price remained somewhat close to cheese prices. Price was sometimes higher and sometimes lower, but it did retain a relationship. The last time butter price was below cheese prices was on January 13, 2015. Since then it has been higher and most often substantially higher.

The once held idea that butter price is the leader of the cheese market by a week or two is no longer the case either. It was a clear pattern that the direction of butter price was generally followed in a short period of time by cheese.

These once solid patterns are not in effect anymore and market predictions cannot be made using this criteria. Why has this changed? My assessment is that markets have matured. No longer is the industry attempting to follow the usual and normal. Each of these markets are moving according to their own fundamentals with little desire or need to keep historical price spread relationships. There does not seem to be the shifting of milk supplies or production from one to the other depending on which category is experiencing a greater return. This does not mean it is not taking place, but it seems to be more limited that it had been. Plants are focusing on what they do best and continue to produce that product efficiently.

Another reason for this change in price relationships is a growing export market. Butterfat is in good demand worldwide and this is being reflected in price. Cheese is moving to various areas of demand with price reacting according to supply. The supply of barrel cheese has been more plentiful than blocks over a period of time which has resulted in the wide block/barrel spread. This does take some of the predictability out of the market as each category moves to the beat of its own drum. I believe this a good thing as it reflects market fundamentals and not what the historical and usual should be.

Butter price significantly higher than cheese has become a normal market and it may remain that way for a long period of time. It seems butter manufacturers can control their manufacturing output and inventory with greater effectiveness than cheese manufacturers. Currently, there are some plants running on full schedules as butter is being manufactured to fill contracts. Some plants have decided to sell a portion of their cream due to tighter supplies and good returns rather than churning. They can better manage inventories and balance supply.

Milk handlers, manufacturers, and buyers of sellers of dairy products are doing business as they see fit and this has changed the historical and usual price relationships and movements.