The outlook for milk prices according to the futures market is not very good. We know fundamentals can change and trader’s perceptions can change quickly. But with current fundamentals, it is not likely to change in the near term unless sellers of cheese reduce their offerings on the daily CME spot market. The attitude of traders is bearish as they have been accustomed to price increases of underlying cash being short-lived. This reduces the reaction to cash price increases. The market will need to prove itself before traders become more aggressive buyers.
It would seem current low prices would stimulate buying interest as prices of cheese and nonfat dry milk are at the lowest levels in over 1 1/2 years with dry whey at the lowest level in 2 1/2 years. However, buyers remain unaggressive due to supply being readily available and demand being good but not good enough.
So why has demand not been able to increase with current low prices? Low prices are supposed to increase demand. There are a few reasons for this. One is that interest rates have been increasing which has impacted consumer spending to some extent. While this may not be a large factor, it is a factor, nonetheless. Food prices have increased at the retail level as well as for food service. Price increases at restaurants have outpaced retail price increases at the grocery store resulting in a slowing of restaurant traffic to some extent. There is quite a bit of dairy products consumed through the food service industry. Higher food prices are impacting consumer spending habits and the type of food purchased. Employee wages have been increasing for companies to retain and attract needed workers. There has been a lack of available trucks and drivers to move product as desired in some cases. This all adds to the costs of getting the final products to consumers and increases the prices consumers must pay.
But with dairy prices at the current low levels, it would seem demand would remain steady or even be stronger. However, the other factors previously mentioned have resulted in dairy prices at the retail level being higher than a year ago even though spot prices for daily products are substantially lower than a year ago. Block cheese price a year ago was around $2.31 with barrel cheese price at $2.40. Butter was around $2.71, nonfat dry milk was $1.74, and dry whey price was $0.55 per pound. The April Class III milk price was $5.90 below April 2022 and the Class IV price was $5.15 below April 2022. There is quite a large difference from prices a year ago. However, demand has not been stimulated as much as would have been expected due to retail average prices.
According to the City Average Retail Prices report for the month of April, the price for a gallon of whole milk was $0.03 higher than a year ago at $4.04 per gallon. The average price for natural cheese was $0.28 per pound higher than a year ago at $5.94 per pound. The average price for processed cheese was $4.76 per pound, up $0.61 per pound from April 2022. Current low prices have not been reflected at the retail level which has made low prices at the farm level unable to increase demand.
Cheese inventory has not increased with butter only slightly higher which should suggest good demand as inventory would generally increase during this time of year. However, that has not been the case as production has been limited to some degree due to some of the afore mentioned issues such as wages, labor, and trucking. Manufacturing plants are running at the capacity of their current workforce and not the capacity of the plant. This has left milk prices on the spot market available at $4.00 to as much as $12.00 under class. This has been ongoing since the end of 2022. It has also triggered the Northeast Federal Order Marketing Order 1 to authorize the dumping of surplus milk last week that will continue into the summer months.
It is the prefect storm with higher retail prices due to various reasons, low milk prices, and milk production increasing as we move through the spring flush. This likely will not correct itself in the near-term. It will be a victory if it can at least find a bottom, a price correction, or some stability soon.
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.
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