The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
March butter stocks hit 243.6 million pounds, according to USDA's latest Cold Storage report, up 8.1 million pounds, or 3 percent, from February and a whopping 59.2 million, or 32 percent, more than March 2015.
American cheese, at 725.7 million pounds, was up 9.4 million pounds, or 1 percent, from February and 91.5 million, or 14 percent, above a year ago. The total cheese inventory stood at a record 1.19 billion pounds, up 8.4 million pounds, or 1 percent, from February and 122.1 million, or 11 percent, above a year ago.
FC Stone's Dave Kurzawski called the report bullish for butter and neutral on cheese. HighGround Dairy's Eric Meyer called it neutral on both.
HighGround says, "Cheese and butter inventories continue to build at normal levels on a seasonal basis," and there were "no material surprises to change the tone of either market," but warned that "heavy cheese and butter inventories are signaling steady to lower prices in the near term."
The analysis also pointed out that the 1.8 percent year-over-year March milk production growth was a "bearish surprise" to the markets. "The increase in the milking herd, upward February revisions along with a strong milk-per-cow performance, set the tone for a potentially bearish stocks report. However, the numbers reported above were in line with historical norms."
The butter stocks build is well below the 2013-14 average, according to HighGround. "That said, the previous 10-year average was 9.5 million and, therefore, HighGround sees little to read into, given how heavy stocks remain. Easter came early this year, which may have pushed butter away from the warehouses and on to store shelves for the holiday. The next two months will be critical in determining how much butter will be available for use later in the year."
HighGround says, "Cheese stocks remain well ahead of last year's levels and while the monthly build from February was slightly behind historical averages (partially due to Easter holiday), inventories remain burdensome. If it were not for very robust domestic demand, it is quite possible CME spot cheese prices would be much lower than their current levels."
Butter buyers are keeping the market "propped up and have remained busy acquiring physical product in order to prevent another $3 summer," HighGround warns, but the data suggests the likelihood of another record price has been diminished."
"As for cheese, the CME spot market is either poised to set new annual lows over the coming 30 to 60 days or prices have already found a level that keeps buyers and their consumers happy. But if less milk is needed to correct the supply/demand imbalance, lower commodity prices are warranted."
Cash prices weakened over the last week of April, with CME block Cheddar falling last Wednesday to the lowest level since January 2011, then inched up a half-cent last Thursday, but closed the week and the month at $1.37 per pound, down 5¼ cents on the week, down a dime on the month and 24 cents below a year ago. The barrels finished at $1.4125, down 1¼ cents on the week, 20½ cents below a year ago, and an atypical 4¼ cents above the blocks. Thirty-nine cars of block traded hands on the week, 21 on Wednesday alone, and 13 of barrel.
China Still Slumping
The markets keep looking for demand indicators. The Daily Dairy Report's Sarina Sharp wrote in the April 22 Milk Producers Council newsletter that "China imported 103.8 million pounds of whole milk powder (WMP) in March, most of it from New Zealand. China's combined imports of WMP and skim milk powder (SMP) totaled 151 million pounds, well below the volumes of March 2013, but 21 percent greater than the prior year and 32 percent more than February on a daily average basis. China also continued to step up its imports of cheese, whey, and ultra-high temperature (UHT) fluid milk."
But the DDR warned that "It will take more than a modest uptick in China's appetite to shake the dairy market from its doldrums. Global milk production will have to fall short of demand for long enough to allow dairy product inventories to return to less burdensome levels. But milk output continues apace. Assuming steady production in Spain and Cyprus and adjusting for Leap Year, milk collections in the 28 nations of the Eurozone were 5.5 percent greater in February than they were a year ago. Output was up 32.3 percent year-over-year in Ireland, 20 percent in Belgium, and 17.5 percent in the Netherlands. In the first two months of the year (excluding Leap Day), Europe has increased milk production by 3.4 billion pounds from 2015."
HighGround Dairy says, "There is a clear shift in China's demand for dairy products that continues to take place, most notably a new normal requirement level for milk powders. Whole milk powder volumes into China have improved over the prior year but continue to be unrivaled to 2014 volumes and flat compared to 2011-12. While skim milk powder imports are also lower versus two years ago, China has seen a rise in demand for SMP-based products such as yoghurt. New Zealand has maintained its dominant market share of WMP and SMP volumes into China but Australia shipped the largest amount of SMP during March since July 2015."
"Infant formula imports maintained strength over the prior year for 13 consecutive months as China's list of domestic manufacturers that have violated food safety standards keeps growing."
HighGround adds that "China's move towards Western diet trends continues to result in the growth of cheese imports due to the expansion of Pizza Hut and McDonald's restaurants." "Yum! Brands' first quarter 2016 sales were reportedly better-than-expected as their core operating profit saw 21 percent growth, driven by a 42 percent jump in the chain's China business. McDonald's is adding 1,000 restaurants on a wager that any downfall in the economy will translate into increased fast-food sales."
However, HighGround warns that "China continues to hold onto record debt ($25 trillion) as of March, with analysts warning of a financial crisis. Since the country is currently relying on volatile short-term funding through sales of high-yielding wealth management products, some fear that they will experience 'a Lehman moment reminiscent of the U.S. in 2008.'"