Dairy market fundamentals are increasingly bearish in the near term and Class III prices may decline even further this fall.
Prices: On Monday, August 26, 2013 spot prices for cheddar cheese blocks and barrels at the Chicago Mercantile Exchange (CME) were $1.6950/lb. and $1.7050/lb., respectively. CME block and barrel cheese prices are down since late July (7/29/13) -$0.0675/lb. and -$0.0550/lb., respectively. During the same time period, butter is down to $1.3950/lb. (-$0.0350/lb.). The CME Class III futures averages (8/26/13) for 2013 was down to $17.69/cwt. (-$0.12/cwt.), the next 12-months was down to $16.99/cwt. (-$0.30/cwt.), and 2014 was down to $16.66/cwt. (-$0.35/cwt.). These Class III futures averages correspond to potential USDA Michigan mailbox prices of $18.71/cwt. (2013), $18.00/cwt. (next 12-months), and $17.67/cwt. (2014). Figure 1 shows the current (8/26/13) CME Class III futures averages for 2013, the next 12-months, and 2014 are at the 65th, 54th, and 48th percentiles, respectively.
Michigan State UniversityFigure 1: Cumulative probability graph of USDA announced Class III prices (2007-present) and current CME Class III futures averages.
Supply: In July U.S. milk production rose 1.1 percent as compared with July 2012 which was below trend (+1.5 percent, 2007-2012). July production in Michigan increased 3.1 percent compared with July 2012. Due to “sequestration” budget cuts NASS did not report dairy cow numbers or milk per cow for July. Dairy cow slaughter in July was up 11,700 head as compared to July 2012. However, it is very likely the U.S. dairy herd at least remained stable in July. Average cull cow prices have softened a bit, but remain historically high at $80.90/cwt. (-1.1 percent compared with July 2012). The USDA reports an decrease in dairy feed prices in July of 0.5 percent compared with July 2012. The July milk:feed ratio, at 1.52, was below 2.00 for the thirtieth time in the past 32 months.
Demand: Total commercial disappearance of dairy products for 2012 finished the year slightly below trend (+1.5 percent, 2007-2012) at +1.4 percent. So far for CY-2013 (January-May) total commercial disappearance was down 0.7 percent. February-May total commercial disappearance was a dismal -1.4 percent below February-May 2012. The January-May disappearance of individual dairy product categories was: American cheese, +1.2 percent; other cheese, +1.5 percent; nonfat dry milk, -15.3 percent; butter, +1.0 percent; and fluid milk, -2.7 percent (through June) as compared with January-May 2012.