The month of July has been friendly for most commodities as grains have made leaps and bounds higher from the June 30th lows, crude oil follows suit with heating oil and gasoline all with the uncertainty of war escalations in the Black Sea region as well as the Strait of Hormuz on top of hot dry weather forecasts. Dairy products too are feeling the effects of volatility in the midst of all of this market news, bringing speculators in to trade more daily trends rather than the fundamental long term positions we are used to seeing in the dairy futures market.
Class III has rallied over 30 cents since July 1st, Class IV 40 cents higher, with Cheese 35 cents higher. Butter, on the other hand, has fallen from it’s small peak on June 30th, roughly 13 cents on the July futures contract, bucking the trend of the rest of the dairy markets due to unconcerned buyers amid a major heat wave limiting milk production in many parts of the country.
Heat Puts Pressure on Cheese Supplies
Cheese has been feeling the effects of the heat. Cow comfort has been struggling with the inability to cool cows during a massive heat dome covering most of the country. With heat and uncomfortable cows, we see almost immediate drops in milk production, limiting supply for buyers and processors.
While the timing of heat waves is something we see this time of year, every year, and milk production usually has a lull by mid-summer, cheese plants are still feeling the struggle of sourcing milk for production. Many buyers have turned to the spot market to meet immediate needs, creating some excitement especially in the cheese market. Blocks increased by over 17c in the month of July, where barrels have increased by nearly 12 cents.
Butter Follows a Different Path
Butter has not had the same reaction. Cream remains plentiful despite lower milk production. Futures have fallen since the end of June, and cash has declined over 8 cents. Processors have not reduced production rates as they have not seen the supply constraints seen in the cheese market. While Class IV has been able to gain ground since the first of the month, it has been handicapped by the downturn in butter even though nonfat dry milk has been supportive.
Short-term Gains Face Long-term Questions
Traders are short-sighted when it comes to hope for a rally in the market. While milk production has softened this month, overall, the USDA predicts higher milk production for the year, as we have seen since January, we are on track for a huge year. This is seen when looking at the market structure as the higher prices are fairly short lived in the here and now. The deferred futures months are still a notable discount as this market fights and claws for the demand both domestically and abroad.
This places producers in a difficult situation as long-term hedging does not look as attractive as the prices today. Using marketing solutions that protect downside as opportunities arise can be useful tools as they allow for some upside should we see milk production take a longer time rebounding than expected especially while demand is as strong as we see today. Any supply concerns can turn into bigger opportunities, but a month of hot weather isn’t enough to get there today.
Sarah Jungman is a commodity broker with AgMarket.Net and AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Sarah’s office is located in Winterset, Iowa and she may be reached at 515-272-5799 or through the website www.agmarket.net.
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
