Cheese Prices Take a Dramatic Change Higher
Since the low was set about a month ago, block cheese has increased 47.25 cents and barrels have increased 33.25 cents by the close of spot trading July 21st. The last time we saw a movement of this magnitude over such a short period of time was in late 2020 into early 2021.
The seasonal purchasing of cheese for demand later in the year generally begins in mid-summer and this year it began with a vengeance. After nearly a steady decline of cheese prices since March, prices quickly moved higher as buyer interest increased as prices moved higher. This brought more buyers in from the sidelines as they needed to purchase cheese before prices increased further. This resulted in a leapfrog effect similar to what you see at auctions when a few individuals want to purchase a certain item and try to outbid each other. It does not make any difference that there is sufficient supply currently available. The fear of being left behind takes over with buyers needing to get some purchases on the books.
Some of what began the buying was due cheese inventory running slightly below a year ago though the first half of the year. Manufacturing plant capacity has been lower due to a reduced workforce resulting in spot milk being available for over six months as low are $11.00 below class and milk needing to be dumped. This limited the gain of cheese in inventory. Another aspect was the reports of heavier culling taking place due to low milk prices. Heavier culling means less milk in the future as milk production declines.
The June Milk Production report showed a decline of 20,000 cows in the top 24 states from May with the U.S. cow numbers declining 16,000 head. This is nearly a repeat of August 2021 when there was also a decline of 20,000 head with heavy culling following the next few months of that year. Decreasing cow numbers and other factors led to record high milk prices in 2022. Traders tend to look over their shoulders and the large rally that began in 2021 is still vivid in their memories. This may influence trading for a time as they look at similarities. Market fundamentals are somewhat different, which may influence the extent of the strength of prices, but the psychological aspect of the market may create substantial volatility.
What is interesting is that the June Livestock Slaughter report did not show an increase in slaughter of 16,000 head of dairy cattle for the U.S. during June. Dairy cattle slaughter totaled 255,700 head during the month. This was an increase of 6,600 head from May leaving quite a bit of discrepancy between the slaughter report and the decrease in cow numbers reported in the June Milk Production report. Higher slaughter with less of a decrease in cow numbers or even an increase in cow numbers can be explained due to replacements coming into the herd. Less slaughter and a significant decrease in cow numbers for the same month is difficult to explain.
The Bi-annual Cattle inventory report showed dairy cattle inventory on July 1st at 9.40 million head. This was the same as July 2022. Replacement heifers at 500 pounds and over totaled 3.65 million head and were 100,000 head less than a year ago. What we need to take note of is the percentage of replacements to cows is 38.8%. This is the lowest percentage of replacements to milk cows since July 1997. The number of replacements to milk cows is always higher on January 1st, but this is the lowest for July for quite some time. Replacements have been tighter for a period of time, and this may have a greater impact as we move through the rest of the year.
For more on milk prices, read:
- Turbulence to Continue in Dairy? Ag Economists Offer Sliver of Hope
- China’s Weakening Economy Spells Trouble for Dairy
- Multiple-Year Low Margins to Eventually Cut Supply
Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in trading commodity futures and options on futures. It may not be suitable for everyone. This material has been prepared by an employee or agent of JSA and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.
