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Weekly Dairy Report

by Valley Futures Trading, LLC.

Vol. 08, No. 36 – September 5th, 2008

Bull vs. Bear

Bull Horns:  

Ø   Cash cheese prices began to move up this week.  Cheddar blocks closed at $1.78½, up 8¼¢ and barrels closed at $1.77½, up 14¼¢.

Ø   Cash butter prices made a new yearly high this week ($1.69), and finished the week at $1.66, up 4¾¢.

Ø   CME butter stocks in approved warehouses were reported this week at 80.9 million pounds, down 42% from last year at this time and 32% below 2006.

Ø   Fluid Milk & Cream Review reported this week that manufacturing milk interest is good; plant operators in the Midwest are looking for supplemental milk volumes to fill orders.  Reported spot prices range from around $1.00 over class (during the weekend) to about $1.50 over, net seller.

Ø   This month’s Dairy Products report showed that July’s butter production was up slightly (up 0.1%) compared to July 2007 (see graph below).  This doesn’t seem like enough to keep up with current demand and to build fall inventories.  

Bear Claws: 

Ø   On the bearish side of the Dairy Products report, production for both total cheese and American cheese were up 1.5% and 4.9% respectively in July 2008, as compared to July 2007 (see graphs below).

Ø   The NDM powder market undertone remains weak.  According to Dairy Market News, demand is more subdued from domestic and export accounts.  World market pricing for NDM/SMP and whole milk continues to trend lower and is causing pressure in U.S. markets.

Ø   Despite Class I demand increasing, as schools resume classes, bottlers were having minimal difficulty in acquiring extra loads of milk they needed.  The stormy weather in the South continues to impact milk volumes, as less is needed to supplement local supplies.

Ø   More poor economic news was reported this week as the jobless rate hit a 5-year high of 6.1%, as payrolls fell more than expected.  This news was exasperated by the fact that home foreclosures accelerated in the second quarter to the fastest pace in almost three decades as interest rates increased and home values continued to fall.

Mixed & Other News:

Ø   CWT – Cooperatives Working Together announced that they accepted three export assistance bids last week.  Two bids were from Foremost Farms of Baraboo, WI for the export of 500 metric tons of butter to Egypt and a second for the export of 350 metric tons of butter to Morocco.  The third bid was from Dairy Farmers of America of Kansas City, MO, for 18 metric tons of anhydrous milkfat to Mexico.

Week-End Comment & Discussion:

For the week, the remaining 2008 average milk price (September thru December) gained 25¢ this week to $16.51, and the 2009 average milk price fell 37¢ to finish the week at $17.12.  The first six months of 2010 fell 36¢ to finish the week at $17.73.

Following is a recap & comparison of last week’s milk prices:

General Market Comment:

Last week it was reported that the commercial disappearance of American cheese in June 2008 was down 3% compared to June 2007 and further, that for the first six months of 2008, disappearance was only up ½%.  These were somewhat disappointing disappearance numbers and they had many folks (including us) talking about “demand destruction”.  In fact, when we consider that cheese prices started at $2.20 in June and eroded to $1.90 by the end of the month, the “demand destruction” excuse for falling cheese prices makes sense. 

However, what if it really wasn’t “demand destruction” but rather just a “demand-delay” that caused prices to fall?  In other words, the high prices occurred at a time when seasonal demand was naturally less aggressive and buyers lived hand to mouth.  So, prices could have corrected simply because the high prices occurred at a time when demand could afford to be patient.  This could leave us in a situation with a lot of pent-up demand.

That being said, we are now in a situation where the cheese price is much lower and, heading into the high demand season, demand could explode.  As an example of how demand returns at lower prices…cheese sellers at the CME over the past 4 weeks have been throwing large quantities of cheese at buyers…but it now seems as if buyers have absorbed all that could be thrown at them.

As for next week, we are looking for cheese prices to continue to rebound, as buyers look to secure holiday needs.  Of course, once the holiday demand season is over, milk producers need to make sure they are covering their downside risks.  Selling milk now and buying some CALL options to cover the upside seems like a prudent strategy.   

Give us a call for our current hedge/trade recommendations or with any questions or comments.  

Call us at 1-800-423-4665.

To those who read our report and borrow our ideas and/or research occasionally, we don’t mind sharing our ideas with the industry; we’d just appreciate an appropriate footnote or link to our web page. Thanks. J 

*The risk of loss in trading commodities can be substantial, and past performance is not necessarily indicative of future results. Therefore, you should carefully consider whether such trading is suitable for you or your organization in light of your financial condition. Neither the information nor any opinion expressed shall be construed as an offer to buy or sell any futures or options on futures contracts.

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