The recent strength in the futures market is certainly welcomed. This is however, much discussion over further upside potential and whether current prices will last. The quick increase in mid-September and then quick decline is still fresh on everyone’s mind. There is fear that cheese prices and milk prices will not hold for a long duration. The past five years has proved this although price increases were quite a bit less than is currently being seen in the market.
The difference between what took place back in September and what is happening now is that there does not seen to be a price void under the market. The movement higher is real with support coming from a number of different areas. Milk supply is tightening in the Central and Northeast regions as farms continue to exit the dairy business. Milk per cow may be declining due to challenges with feed quality. (However, this was not evident on the September Milk Production report). Other areas of the country are holding well with milk production. The month of October might be a little different story once those figures are released.
We do not know yet for sure, but cheddar cheese exports might be improving. Year-to-date cheese exports through the month of August show exports 2% above the same period a year ago. September export numbers will be released soon providing an indication of international demand in the current political environment.
Demand is also improving as the holiday period is upon us and with it generally comes increasing domestic demand. This should provide support through the period of buying to fill orders. Barrel cheese seems to be in a much tighter situation with price leading the charge higher. Spot trading last week showed price increases without any trading activity throughout the week. Either sellers are holding back with supply or supply has tightened significantly. It appears the latter scenario is correct for the time being. This can change quickly.
With that being said, there seems to be good support under the market. However, Class III futures continue to show a steep discount to the current market as traders anticipate cheese prices to drop off as demand through the end of the year slows and the calendar moves through 2020. Traders are loath to eliminate the steep discounts due to what has taken place over the past 5 years. It will take a monumental effort for futures to move back to a more normal and seasonal market.
Even though there is a discount to later months, there is a potential for the market to retrace and futures to drop off in reaction to supply and demand. It is unclear as to the effect higher milk prices will have on milk production. Generally, production increases eventually exceeding demand and driving prices lower in order to spur greater demand. However, this year may be different as expansions will be limited with production increases being confined to increasing cow numbers within current market facilities.
Currently, there seems to be greater support under the market than we have seen over the past number of years. However, this does not necessarily mean that prices will remain above what current futures prices indicate. Caution needs to be exercised and price floors need to be established in order to protect cost of production to rebuild equity.
Original article sourced from https://www.milkbusiness.com/