As I read over my previous CMN guest columns along with those of my colleagues over the past nine months, it appears we made some insightful observations and predictions.
Last June, I stated that the nonfat dry milk price direction would have a direct impact on the Chicago Mercantile Exchange (CME) cheese market — and look how that turned out! Others pointed to the inverted forward curve in Class III milk and Cheddar cheese futures as an opportunity for strength in Q1 exports — another home run. And another article cited solid Chinese dairy demand growth in the fourth quarter as a reason to remain bullish — and the import data out of China continue to astound us all.
Yet with all the bullish indicators flashing before us and written about last quarter, no one (myself included) predicted U.S. cheese prices would be even close to $2.00 in January, let alone setting all-time highs. Instead we favored “domestic seasonality” as our rationale for lower prices. I think all of us learned a valuable lesson over the past 90 days. Welcome to the evolving global dairy markets.
So what next? Could the CME block Cheddar price possibly move higher from where it stands today after setting record highs last month? It is unlikely, but certainly not out of the question. The U.S. cheese market does not live on an island, nor is it the primary driver of milk prices these days. In fact, it has been relegated as a price follower. And as such, the most recent prices out of Oceania are $2.17 per pound for April delivery on the Global Dairy Trade auction platform earlier this week and the USDA midpoint price of $2.38 per pound released Feb. 13. While U.S. prices can oscillate in a wide range due to short-term ordering patterns, cheese appears well supported at these levels.
The global market has signaled its need for milk powders in 2013 which forced Class IV milk into the driver’s seat, guiding U.S. market direction for the past 12 months. And with China importing 1.9 billion pounds of skim and whole milk powder in 2013 — nearly 50 percent higher than last year and more than double the volume just three years prior — global milk sheds are adapting to satisfy exploding emerging dairy market demand. As a result, countries like New Zealand are shifting their production mix to commodities that deliver the highest return to their farmers. Milk powder production is on the rise around the globe while cheese production has suffered.
New Zealand’s Q4 2013 total cheese exports declined by 52 million pounds (down 25 percent vs. Q4 2012) but the United States made up for that deficit by expanding exports by 62 million pounds during that same time frame (up 48 percent versus Q4 2012). With whole and skim milk powder prices stuck at extreme highs, global milk production growth is finding its way to the dryer vs. a cheese vat. And until the United States proves it can sustain solid milk production growth, we find it difficult for domestic cheese prices to show any signs of breaking sharply below support levels.
Multiple sources have suggested the upcoming “spring flush” will bring U.S. cheese prices back to the $1.60s by late spring. This would suggest a “wall” of milk is coming with nowhere to go but the CME spot market. We are not sold on this hypothesis.
Instead, we remind ourselves that it is the same “seasonal rationale” that led us to predict cheese prices to be in the $1.60s by January which never materialized. New Zealand experienced the same surge of milk production growth this past October during their peak season only to see the global market shrug it off. International demand has been extraordinary over the past six months and much of the growth may already be committed against cheaper futures contracts late last year or even during January’s surge. Fonterra stated in November that it is losing money on every kilogram of cheese it makes, so do not expect it to have any incremental product this season. This leaves the United States as the only viable source for cheese if the world needs it. And so far, global buyers have not shown notable resistance at $2.00+ per pound. In fact, cheese remains a reasonably priced protein source versus other options, even at these levels.
Eventually, the wall of milk will come and prices will show a very noticeable decline. But for now, expect firm prices to remain for the foreseeable future.
CMN
The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.
*These observations include information from sources believed to be reliable, but no independent verification has been made and therefore their accuracy and completeness cannot be guaranteed. Opinions and recommendations expressed are the opinion of the author and are subject to change without notice. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.
Source: Cheese Market News
