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Cheddar Cheese Price Rebounds After Falling from Five-Year Highs

by Lee Mielke

Published: Friday, October 4, 2019

The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."

Hemorrhaging in the cash cheese market appeared to have come to an end the last week of September as traders awaited the August Dairy Products report issued Oct. 3 and impeachment drums resounded in Washington.

You'll recall that block Cheddar peaked Sept. 16 at $2.2375 per pound, highest CME price since Oct. 22, 2014. It eventually plunged to $1.9025 on Sept. 26 but regained 5¼ cents on five trades the following day, to close Sept. 27 at $1.9550, still 9½ cents lower for the week, down 28¼ cents from the peak, but 26½ cents above a year ago.

The barrels peaked at $1.94 per pound Sept. 16, highest since Nov. 11, 2014, plunged to $1.6125 on Sept. 24, but also rallied last Friday, up 4¼ cents on five trades, and closed at $1.6550, unchanged on the week and 27¼ cents above a year ago. The spread hit a record high 43¼ cents on the 23rd but fell to 30 cents last Friday. Seventeen cars of each were sold on the week.

The September Class III futures contract settled Sept. 26 at $18.28 per hundredweight. That, plus the remaining month's settlements, if realized, would result in a 2019 average of $16.51, up from $14.61 in 2018. The 2020 futures portended an average of $16.87, with the peak month for the year at $17.25 in September.

Midwestern cheesemakers continued to express concern over the ongoing "market correction," said Dairy Market News. "A large price gap between blocks and barrels has a tendency to increase buyers' hesitation," DMN reported. Central cheesemakers say spot milk is generally tight and spot milk prices ranged from 25 cents to $1.75 over class. Cheesemakers are increasing their condensed skim and nonfat dry milk usage for fortification, according to DMN. Production rates are steady, and inventories are "somewhat balanced in the region."

Western cheese output is active, with plenty of milk available. Barrel inventories are heavy, but block are tighter. Stockpiles of Mozzarella are substantial, but contacts suggest seasonal pizza demand will take much of it. Traders speculate the tightness on blocks nationwide was behind the rise in prices on the CME. However, the precipitous fall is "harder to explain." Export demand has cooled.

FC Stone stated in its Sept. 25 Early Morning Update, "We've said that a block price somewhere around $2 per pound seems to make sense to us. We think stocks have been drawn down more significantly here in September than back in August, relegating that Cold Storage report to the 'old news pile' rapidly. Still, in the wake of last year's slower fall holiday sales, it's hard not to remind ourselves and our customers that cheese tends to peak this time of year. We think there are still a number of supply-demand fundamental factors that ought to be supportive of cheese prices moving forward, but now we're in correction mode."

Cash butter finished the week at $2.1475 per pound, up 3¼ cents but 17¼ cents below a year ago, with just five cars sold on the week.

Butter producers continue to relay widely available cream offerings which were expected this time of year. Cream offers are coming in from local sources and from the West but are carefully scrutinized due to extra transportation costs and the growing local supplies. Churning is steady, but producers are keeping a close eye on fall butter stocks. Demand reports vary from flat to somewhat bullish.

Western interest in butter has weakened somewhat as buyers take a break to reevaluate market conditions, hoping prices will fall, according to DMN. Buyers' confidence in finding the supplies they need whenever they feel the need is also stronger. As a result, most buyers with immediate needs are looking to purchase in the short-term. Others are waiting for the "low of lows prices." Cream is available to butter processors, but they are not easily getting discounted loads. Churning is steady. Expensive prices in the domestic market compared to the global market and the strong dollar have led to more imports, according to DMN.

Grade A nonfat dry milk fared well, climbing to $1.11 per pound by last Friday, up 2¾ cents on the week and the highest since March 3, 2015, and is 23½ cents above a year ago. Nineteen cars were unloaded on the week.

Dry whey fell to 33¾ cents per pound last Wednesday but closed last Friday at 34¾ cents, down a nickel on the week and 20¼ cents below a year ago, with 29 sales on the week.

U.S. butter stocks slipped in August but remain above a year ago. The USDA's latest Cold Storage report shows 305.1 million pounds in the cooler, down 24.5 million pounds, or 7.4 percent, from July but 14.3 million, or 4.9 percent, above August 2018.

American cheese stocks totaled 768.2 million pounds, down 6.6 million pounds, or .8 percent, from July, well below the five-year average drawdown of 20 million pounds, and were 19.2 million, or 2.4 percent, below a year ago.

Stocks in the "other" category climbed to 567.9 million pounds, up 7.6 million pounds, or 1.3 percent, from July but were up 26.1 million, or 4.8 percent, from a year ago.

The total cheese inventory was virtually unchanged from July and up slightly from a year ago, coming in at 1.363 billion pounds, up 705,000 pounds, or .1 percent, from July and 2.6 million pounds, or .2 percent, above August 2018.

While all eyes have been on the roller coaster cheese prices, FC Stone reported in its Sept. 20 Early Morning Update that "replacement heifers have also been getting some attention." It stated, "A frequently quoted price is $1,400, up from $1,100 just a couple of months ago. Heifers are still far away from the $2,000-plus price associated with $20 milk. In general, the heifer market is tightening up. That said, slaughter in August was still strong enough to suggest a decline in the herd, but the pace has certainly slowed down in recent months. The weekly numbers are staying below year ago, but not by enough to argue that the herd is starting to rebuild yet."

The U.S. and Japan have signed a trade deal that U.S. Secretary of Agriculture Sonny Perdue says is "a better deal for the entire U.S. economy, but is a particularly big win for our farmers and ranchers." He added, "When I visited Japan in May for the G20, I made it clear that the U.S. is Japan's best customer and we felt that relationship was not reciprocal. This agreement helps level the playing field."

The Daily Dairy Report points out that "unlike a full trade deal, U.S. trade law does not require Congress to ratify a limited agreement. Instead, the executive branch can employ executive-proclamation to initiate reciprocal tariff reductions."

The signing drew praise from the U.S. Dairy Export Council and the National Milk Producers Federation, stating the interim agreement will "deliver improvements in market access for the U.S. dairy industry, while noting that the work to secure a sufficient competitive landscape in Japan for dairy is not finished."

The two groups stated that they "look forward to reviewing with their members the details of this first stage of a trade agreement with Japan to take advantage of the new opportunities it will provide on a near-term basis while continuing to work with the administration to secure the additional elements that are still needed to ensure a strong final dairy package in a comprehensive agreement."

In other trade news, we got a look at China's August dairy imports. HighGround Dairy reports that "even though whole milk powder imports dipped lower versus prior year levels, volumes remained on trend and are well above prior year levels. Skim milk powder imports continued at a record pace and remain impressive as the country takes advantage of product from both Oceania and the EU at the expense of U.S. powder, which was down 99 percent YoY."

"The resurgence in whey demand was impressive," said HGD. "With volumes exceeding 2017 levels and coming the closest to prior year levels since January, at the beginning of the swine fever outbreak. But China shifted demand to the EU and Belarus at the expense of product sourced from the U.S., down 15 percent."

"Fluid milk and cream demand continues at a record with the country sourcing primarily from Oceania and the EU," said HGD, and "estimates that internal fluid milk demand has also pulled Chinese milk away from powders, contributing to the stronger WMP and SMP imports over the past several months."

"Looking ahead, HGD believes that Chinese purchases could slow slightly into fourth quarter as higher prices arrive, but January demand will be strong yet again. HighGround assumes some stockpiling was done in recent months but continues to assert that a large volume of stronger Chinese imports are being consumed, especially in the protein markets as meat prices climb higher."

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