Volatility has increased in spot cheese trading with the month of March showing some strong price swings. Block cheese price from March 1st initially moved from $1.90 down to $1.78 by March 10th. It then rebounded to $2.10 by March 27thand fell back to $1.85 by March 31st. The movement was similar to the volatility we saw in mid-December through mid-January. Barrel cheese has not had quite the movement of blocks, but prices have retraced a good portion of what it had gained in early March. This keeps futures traders guessing and the markets volatile.
Once cheese prices move low enough, buyers step in to purchase supply to meet demand or increase ownership for aging programs and later demand. It seems that once prices begin to move higher, buyers become excited and attempt to outbid each other in order to obtain supply before price moves higher. The same holds true when the market shows weakness. Sellers become more aggressive propelling the market lower. Those type of movements are becoming more common over the past few years than they have been in the past.
There may be more volatility in cheese recently due to the inability of cheese inventory to increase so far this year as it generally does. Overall demand has remained strong and enough to keep inventory from increasing even with higher milk production than last year. What has been a hinderance to stronger cheese output is the lack of employees at manufacturing plants. Plants are running at full capacity relative to their workforce and not the capacity of the plants. This has been reiterated numerous times by various plants. This may be the reason spot milk continues to remain historically low from week to week and inventory from increasing. Plants would normally be glad to absorb spot milk at reduced prices but are having a difficult time keeping up with what they have from patrons or regular suppliers due to a lack of employees. This could become a greater bearish problem when spring flush is in full swing, and sellers find no one willing purchase extra milk. Milk production continues to run ahead of last year and is expected to continue to do so for the foreseeable future.
Yet, even though many plants are having difficulty maintaining a full workforce, cheese continues to be produced at a greater level than a year ago according to the monthly Dairy Products report (see chart). With American cheese production outpacing last year by a significant amount and inventory not building seasonally, it would indicate demand is good and keeping pace with increased cheese production.
Last year, American cheese inventory followed a similar pattern with stocks decreasing the first three months of the year before increasing seasonally. We had record high milk prices with inventory higher than it currently is. The difference last year was that we went through a period of heavy culling with a strong anticipation of lower milk output and tighter supplies. The market is not in that current situation with cow numbers increasing and running above a year ago while last year they were decreasing with cow numbers briefly falling below the level of the previous year.
Cull cow prices are strong but it not enough to spur heavier culling as dairy producers intend to produce as much milk as they can to maintain cash flow.
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.
