A heavy bearish cloud seems to be hanging over the market.
When spot cheese prices increase, there is limited futures price strength. When spot cheese prices weaken, futures prices fall quickly. Part of the reason for this is due to the pattern that has been established over the past 1 1/2 months. When cheese prices increase for a few days, the attitude became more bullish with traders buying into the market only to discover they were on the wrong side of the market again. After each price bump, cheese prices fell back resulting in new lower prices again. Once this happens a few times, traders turn cautious and are not willing to buy into increasing cheese prices. Recently, most Class III futures set new contract lows as barrel cheese price declined to $1.2050, a level not seen since 2009.
In order for the market to reflect underlying cash price increases, with the exception of the front-month contract as it needs to converge to cash, the market will need to prove itself. If traders feel more confident of upside price potential, premium will be put back into the market. Until then, the bearish blanket will remain over the market. It is unclear at what level underlying cash will need to reach in order to change market sentiment.
Tariffs are providing a level of uncertainty which may or may not have an impact on the market. The current perception is that exports will slow resulting in dairy products backing up into the market. It is uncertain whether this will be the case or if buyers will continue to purchase dairy products despite increased tariffs. Consumers may delay purchasing manufactured goods such as automobiles due to higher prices, but they will purchase food in one form or another or from one supplier or another. Most consumers do not discontinue driving automobiles and likely will not drive them less just because fuel prices increase due to the necessity of travel. The same may hold true for dairy products.
Recent hot weather in many parts of the country has impacted milk production. Many plants have seen declining milk receipts to the point that some plants are looking to purchase milk in order to keep plants full and orders met. There has certainly been a stark contrast over the past two weeks in the Midwest. Two weeks ago, milk was being purchased for $2.00-$4.00 below class. The latest reports are showing purchase prices of $2.00 below to $0.50 above class. There is no shortage, but a definite change in supply.
Lest we think demand for dairy will continue to lose market share to alternative products, there is much optimism for increasing demand for dairy products around the world. The latest research report from the International Farm Comparison Network (IFCN) indicates global demand for milk over the next 12 years with be 3 times greater than current U.S. milk production. IFCN forecasts an increase in milk production as well as demand of 35% by the year 2030. There will be increased growth in milk production as other countries seek to become more self-sufficient. Technology will become a greater part of dairy farming and efficiency of producing milk. So despite current tariffs and the uncertainty of how that may affect the U.S. dairy industry for the short-term, there is plenty of export opportunity yet to be developed and demand yet to be filled.
Article sourced from https://www.milkbusiness.com