Nowhere has this been more evident than in the Class III market. Futures have been choppy with significant price swings since mid-July of as much as $2.00 or more. Trader psychology has flip flopped as well. For a short period of time, steady spot cheese prices were viewed as bullish to the market resulting in futures finding support and moving higher. After a few weeks, the attitude switched back the other way again in which steady cheese prices were viewed as bearish similar to what it had been June through much of August. This was very evident last week as block cheese price increased 14 1/2 cents with barrel gaining 15 3/4 cents, yet Class III futures closed lower on the week. Traders did not like either or both categories remaining steady during spot trading. As I have said before, the market needs to prove itself that prices are trending higher before traders will feel confident the strength will continue. It may be one of those times during which traders will remain cautious and somewhat bearish even though prices are finding some strength. By the time they finally feel confident to turn bullish and buy into the market more aggressively will be about the time the uptrend this run its course. This has happened a few times in the past in this type of market environment.
One of the fears that has been in the market is the fear of a price void developing as cheese prices were moving higher. But that does not seem to be the case indicating the recent strength has been real and not fear driven. Yes, it is certainly a concern there are record cheese inventories, but there may be some tightening of the fresh cheese market. If the demand is for fresh cheese and fresh supply is tight, spot price will increase due to what is traded on the daily spot market is cheddar cheese no more than 30 days old. There have been reports of demand increasing which has tightened supply at the plant level.
Class IV prices have been moving differently and have been maintaining stronger prices. Butter has been the driver of the market. Butter price ha recently set a new high of $3.24 but has fallen back quickly from that level. It is yet unclear whether high price have impacted demand to any great extent or whether buyers had purchased sufficient supply for the time being and are now waiting to see how orders will develop as the holidays approach. Buyers have been purchasing steadily much of the year to increase ownership in the event supply tightens. Price may have risen too far too fast and could set back to a level of supply demand balance.
It is difficult to determine how dairy products will fair during this period of high inflation. The Federal Reserve may increase interest rates rather aggressively to bring under control. One thing we do know is that fluid milk product sales continue to decline. This has been an ongoing problem for numerous years. Other than a brief year over year increase in 2020 when people were at home and were looking to improve their eating habits due to Covid, fluid milk consumption has been declining. July fluid milk sales were 5.0% below July 2021. A decline of this magnitude is rarely seen and may indicate dairy is one area consumers are cutting along with other areas. When looking at the Consumer Price Index (CPI) for dairy products, we see why demand may be impacted to some extent. The CPI for dairy products in general for the month of August increased 16.2% from August 2021. The change over the past five years is clearly shown in the chart below.
The August CPI for fresh whole milk increased 16.1% from year ago. The CPI for cheese was up 13.5% and for butter, it was up 24.6% from August 2021. There is no doubt this is and will continue have an impact on the market now and through the holidays. Price strength now should be considered as a gift and one to take advantage off with the various tools available to protect milk prices. Price strength may not last very long or move very high under the current market environment.
Please contact us if you would like us to help you with managing your risk. I will be at the World Dairy Expo in Madison during the first week of October and would like to talk with you about what we can do to help you manage risk and see what we have to offer. I will be in the AgMarket.Net booth TC 664 in the Trade Center. I look forward to seeing you.
