What's Behind the Recent Rebound in Class III Prices?

Market analysts aren’t certain, but, says one, “If the rally can continue for a bit longer, some contracts in the second half of 2015 could work up toward the $18.00 level.”

Even a dedicated dairy market analyst like Stewart-Peterson’s Bob Devenport doesn’t always know for sure what’s driving prices up or down.

Like others, Devenport isn’t certain why Class III prices have rallied recently. The May Class III contract has climbed well over $2 per cwt. from its January low of $14.25. The June Class III contract has rebounded over $1.50 since April 15, breaking through to the $17 level late last week.

Bob Devenport

“Everybody is asking what the reason is for the rally and what sparked it,” Devenport says. “There is no real stand-out reason for the rally as the fundamental picture regarding the milk market has really not changed over the past couple of months. There still seem to be a lot of headwinds working against a long-term sustained rally in the milk market, but decent demand seems to be enough to limit any downside.”

Devenport’s best guesses for the recent recovery:

• Cheese demand seems to be remaining firm. “We have seen this in the spot market on the CME as well as in the NASS dairy product sales report released each week,” he says. “The buyers on the spot market have been continuing to slowly bid prices higher, and buy up any carloads of cheese offered. Still, volume remains light, and we haven’t seen any major moves in the spot market to support a massive milk rally.” The NASS cheddar cheese price has also been on the rise over the past few weeks and volume has increased as well -- a sign of good demand.  Because of this, cheese futures prices have strengthened as buyers price in a fair amount of premium into cheese futures over the spot market prices. The strength in cheese futures is in turn supporting the rally in Class III prices. 

• Some consolidation in the U.S. dollar, which could possibly be going through a larger correction. The dollar topped out the week of March 9, and has since pulled back and has remained in a wide sideways pattern.  Although the dollar is still at its highest level in a decade, even short-term pullbacks can support a short-term pop in export demand.  “This will remain to be seen, however, given that our dairy prices are still holding sizeable premiums to world prices,” Devenport says.

Looking ahead, Devenport believes the continuing trend of increasing demand and increasing inventories along with the higher dollar could limit a sustained rally. 

“Remember, we are still going into the highest production time of the year, and all it will take is a massive amount of cheese to be brought to market to be sold and prices could take a big hit,” he says. “We haven’t seen that yet, but it is a risk.”

Although Class III futures face strong headwinds that could limit long-term moves, Devenport does see shorter-term opportunities ahead. If prices can continue to strengthen for a few more weeks, he believes that will at the very least present excellent prospects for dairy producers to hedge some of their 2015 production at favorable prices. 

“If the rally can continue for a bit longer, some contracts in the second half of 2015 could possibly work up toward the $18.00 level,” he notes. “That would be a quite impressive rally at a time when prices seasonally are normally on the decline.” 

Watch Bob Devenport give his weekly overview of the dairy market.