USDA released the August Cold Storage report which showed a decline of inventory for butter and cheese. This was certainly a move in the right direction after three consecutive months of total cheese inventory setting new records. Cheese and butter prices have reflected higher inventory and the availability of supply to the industry. Prices have declined, but have not fallen out of the proverbial bed due to strong demand. The anticipation is that strong demand will reduce inventory through the end of the year. However, the extent of the reduction of inventory will be seen over the next four months.
Cheese and butter exports have been suffering for quite some time due to the price disparity between U.S. and World prices. That has been changing as Global Dairy Trade auction prices have been on the rise during the past four events. This has moved cheddar cheese price to $1.60 and slightly above U.S price. Butter price on the recent auction increased to $1.77 compared to the U.S price of nearly $2.00. Butter price still has a way to go while cheese price is becoming competitive. But as I mentioned in my previous article, this may not translate into an immediate increase in exports due to an expected lag time until greater interest is shown and negotiated contracts begin to be filled.
This seems to imply that domestic demand will be the main means to reduce inventory through the end of year. Higher milk production will keep dairy product production strong and able to satisfy much of the demand while inventory will be used to supplement fresh supply to fill orders and contracts. So, it certain is good to see inventory decreasing, but there is concern over the rate of decrease that will be seen. Butter inventory in August declined 10.6 million pounds or 3% from July. However, inventory was 52% above a year ago. This is of concern due to the fact that the decline was quite a bit less than usual resulting in an actual increase in inventory from last year. The July Cold Storage report showed butter stocks were 31% above the previous year. If butter stocks do not decline substantially in September, we could see inventory increase further compared to a year ago. Even though total cheese stocks declined from July, inventory remains at a record high for the month of August.
Strong milk output will continue to add to inventories unless something curtails milk production or demand improves at a greater rate than production. Some other countries have shown a decline of milk output due to the extended period of low milk prices. This may position the U.S. to capture some market share improving demand for U.S. dairy products. Milk output in the U.S. shows no sign of slowing down. Even though dairy cattle slaughter increased in August, the number of dairy cattle in the country increased 16,000 head from July and are 45,000 head above a year ago totaling 9.360 million head. This is the largest dairy herd in the country since the second quarter of 1996.
This is why it is imperative to hedge milk production at least through the middle of next year. The option strategies I have been suggesting over the past few articles allow for flexibility while also providing some protection. Class III futures prices have eroded since my last article and may continue to erode. Any price increases are short-lived and the hope that milk prices will improve does nothing to protect income or provide for a good night’s sleep. We certainly can help your operation avoid a repeat of the first half of this year. Please feel free to contract us. Adding more cows to make of for lower milk prices can only be done for so long before the proverbial wall is hit and there is no where else to go.