AgDairy Market Update              October 31, 2022                  

Cheese Prices Showed Seasonality

It certain has not seemed as if there has been a seasonality to cheese prices this year, but price movement shows there has been. However, milk futures have not reflected that due to an overall bearishness that has been prevalent in the market. Rather than milk futures anticipating higher prices, there has been more of concern over lower prices.
 
The recent decline of cheese prices has been very unnerving considering the price of everything else remains high and is poised to increase further. The outlook is that it will probably become worse before it gets better. I have heard of some areas in which the cost of electricity is going to double or more by the end of the year. There is also a diesel fuel shortage developing that may become worse as we move through the end of the year. A diesel fuel shortage, a possible railroad strike, the ongoing drought, low water levels of the Mississippi river and now Russia suspending its participation in the Black Seas Grain Initiative that has allowed safe passage for grain exports from Ukraine that is necessary to feed millions of people. One wonders how all this will impact food and feed supplies in the coming months not only in the U.S but around the world. On top of this, interest rates are again expected to be raised at least 75 basis points during the next Fed meeting.
 
Many were anticipating milk prices would improve as holiday demand would support underlying cash prices seasonally. This resulted in hesitation to implement risk management strategies as a seasonal rise in prices to the holidays should provide better price opportunities even though fundamentals were suggesting otherwise.
 
Much can change over the course of the year as many factors impact markets. When looking at the cheese market. We can see that there was a seasonal increase of prices during September into October. Block cheese price on August 29^th was at $1.7150 and increased to $2.06 on September 15^th for an increase of 34 1/2 cents. Barrel cheese price on August 30^th was $1.85 increasing to $2.25 by October 6^th for an increase of 39 cents. There certainly was a seasonal move which took place, and the move was significant. Buyers of cheese were aggressively purchasing cheese for recutting and packaging into various venues for the holidays. Retail orders were being placed earlier than usual to ensure production would be available and delivered on time. This pushed prices higher. However, it did not seem like it as outside market fundamentals did not indicate the rise of prices were going to continue. Demand was in question leaving upside price potential seemingly limited.
 
While cheese prices were moving seasonally, Class III milk futures were moving sideways to slightly higher. The outlook for the market through the end of the year was considered bearish by the trade. Milk production was increasing, and cheese inventory remained above year ago levels removing earlier concerns over supply tightness. As cheese prices topped, milk futures came under substantial pressure even while cheese price was holding.  There are many who think the market of overdone to the downside, but it is uncertain whether this is the case. One would think lower prices should increase the interest of buyers. However, with demand uncertain after the holidays, buyers may not be very aggressive as they are able to purchase what is needed to fill demand. Buyers may not purchase ahead in anticipation of demand due to them not know what that demand will be.

Butter has been holding well. There have been much discussion and articles written about a potential butter shortage citing again the seasonal demand pattern. Yet butter price has been chopping around unable to push higher. If buyers were concerned over a supply shortage, price would be substantially higher than it is. It seems that the current price is doing its job of slowing demand reducing the concern over a shortage. If price has not risen further than it has by this time of year, it may be unlikely it will move to new highs over the next two months. If we look at butter futures, they certainly do not indicate a shortage as November futures are significantly lower than October and December futures are trading substantially lower at $2.62, a far cry from the current price and no concern of a shortage.
 
So, it appears the seasonal peak has been reached and lower milk prices will unfold. With large cheese inventories and increasing milk production, it will take a strong increase in demand or a decrease in milk production or both to move milk prices higher. Demand will likely not get any better than it is right now with reduced demand possible due to increasing consumer prices. Milk production is not likely to slow anytime soon as we head into the winter with increased feed supplies.
 
Risk management is as important as anything else on the dairy operation and the reality of this is certainly being seen right now.
 
Robin Schmahl