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  November 6, 2010

Major Disconnect: CME butter and cheese crash

By Sherry Bunting, free-lance writer

On Friday, Nov. 5, USDA released the October Class Price Announcement of the highest Class III price of the year at $16.94. As it has virtually all year, Class IV was the "higher of" at $17.15 for October.

But hours later on the CME, butter crashed 27 cents per pound in one day based on the offer of one load. And just like that... the $2.18/lb price that had lingered for three weeks turned to $2.15 Wednesday and then $1.88 Friday.

The scenario is eerily familiar to what happened on December 11, 2008, when block cheese on the CME dropped 18 cents in one day and barrels fell 22 cents. We all remember that as ushering in the 2009 dairy crisis.

Yet… on the “Taste of Home” website my daughter and I frequent for recipes, the chatter over the past few weeks is high retail butter prices across the country. September’s retail butter price (national average) was $3.53/lb according to the Bureau of Labor Statistics. I paid $3.05 at my local grocery store.

An interview of retailers in the Osh Kosh Hub (Wisconsin) just last Friday, Oct. 29, quoted retailers saying butter prices are through the roof, but also stating that butter is selling off their store shelves.... The story quoted retailers admitting that the 2009 dairy market was previously down so low that the butter price levels of fall 2010 appear worse than they really are.

What supply and demand factors triggered Friday’s unprecedented one-day plunge in the CME butter price?

Reading the USDA Dairy Market News reports, it’s hard to find a reason for it. (But let’s remember those reports are not the same thing as a mandatory, audited, daily electronic price reporting.)

As the CME cheese price lost 16 cents/lb this week and 26 cents/lb over the past three weeks, was this a response by manufacturers to bring butter in line?

Or, as some suggest: Was butter overpriced for the past two months – pushed up to sit high while pre-holiday sales are made and then driven down into the dirt to cheapen costs for manufacturing? Are buyers disadvantaged in the selling window and then suppliers (dairymen) disadvantaged in the manufacturing window? Which market is the market? And who is the market?

As one analyst stated in a phone interview after Friday’s butter price crash: “This is one more manifestation of lousy price discovery, and the correction will be anything but gentle.”

Meanwhile on Friday, Nov. 5, the USDA Dairy Market News (DMN) report stated good demand for butter ahead of holiday needs, and heavy butter production "to stay on top of orders and upcoming needs."

DMN reported that the marketplace was showing concern about the weakening price, but since buyers need the butter for upcoming holiday seasons, they were more concerned about having adequate stocks on hand to satisfy their customers instead of worrying about the decline in the value of their inventory. Retail and club orders were reported "good to heavy," and food service orders are also "increasing."

The USDA NASS dairy products report Tuesday showed that September butter production was 110.5 million pounds. This is 16.7% higher than a year ago, but inventories are reported to be low. CME weekly storage movement reports showed more than twice as much butter moved out of storage as the amount moving into storage.

For the week ending Oct. 30, CME-certified warehouse stocks on hand were 13 million pounds compared with 68 million pounds on hand for the same week in 2009. However, the number of certified warehouses this year is down from 93 to 74, so how do the CME butter inventory movements really compare?

Some have suggested that the butter price was too high for too long and was kept there by manufacturers until it had to come down. Having had it too high for too long may now cause it to be too low for too long. Is the CME spot butter exchange a fraudulent market all the way around? Wouldn’t it be better to know the market as it goes along daily than to have it unexpectedly implode in one day with no chance to react to what you see coming?

Would supply management help in this situation? Where was there time to crank that wheel, that mechanism? Producers are talking. Many are not prepared to get back on this rollercoaster… blind-sided from both ends: milk and feed.

Cheese prices down 16 cents on the week:

Cheese prices lost 16 cents/lb on the CME with blocks and barrels inverted again. Blocks were pegged at $1.48 Friday; barrels $1.51. Meanwhile, USDA Dairy Market News reports that, "Current cheese production remains linked to manufacturing milk availability, which is steady to improving in areas of the Southwest and West, while cheese makers in some parts of the upper Great Plains report an ongoing shortfall in milk intakes."

But, all week, sellers continued to bring lower offers to the CME cheese exchange, pushing the free-falling price 13 cents lower in the first three days of trading. Bids added a penny Thursday before losing 3 more cents Friday.

Here again, some market observers suggest the cheese market, too, was overpriced. So, to move the cheese, the price had to come down. Inventories are still too high and need to be at a more manageable level. It’s interesting to note here that the $60 million in cheese purchases that were part of the $350 million dairy aid package in October 2009, has not all traded hands. The money has been allocated, but the solicitations and actual taking of product has been parceled out and is not yet complete. Furthermore, the solicitations have been for chunks and shreds which move less volume for the money, but that is what the food banks said they wanted… when asked.

U.S. monetary policy could be at the root of this issue in combination with consumer spending patterns in this slow-to-recover economy. Bottom line: Can consumers pay the price dairy producers need to cover their costs given the rising input prices? There is now an inflationary trend built into this, which could add more pressure to the downcycle.

Margins squeezed by higher feed costs

At the farm level… even the current high milk checks of the year are being challenged by unexpectedly high feed prices. Margins will be squeezed before the lower butter and cheese prices at the CME this week even get figured into the NASS Survey and the producer milk check four to six weeks from now because the cost of feedstuffs have already increased 10 to 15% last month to offset the gain in October’s announced milk prices.

Some are predicting corn prices of $7/bu before the winter is over depending on basis and location. This, and the lower price for milk on the horizon, is expected to reduce milk production through the first half of 2011.

USDA estimates the All-Milk price for October was $18.30, which is about 60 cents/cwt. higher than the revised All-Milk price for September. However, USDA also reported October’s corn price rose 70 cents to $4.78/bu., alfalfa hay increased $1 to $118/ton and soybeans gained 72 cents at $9.98/bu.

From these prices for milk and feedstuffs, USDA calculated the October milk-feed ratio at 2.23, which is down 15 points from the ratio of 2.38 for September. A ratio of 3.0 is considered profitable.

September total cheese production up 4.3% over year ago:

Declining cheese prices came on the heels of the USDA NASS report, which pegged September cheese production at levels 4.3% above year ago, but lower than August of 2010.

Italian cheeses (mainly mozzarella) made up almost 42% of the total cheese production, up 5.5% from year ago; while American cheddar and colby styles made up 40% of the total, up 3.1% from year ago. Swiss cheese production was up 9.5% above year ago and other cheese types were up 19.7% over year ago.

California cheese production surged more than 10% above year ago for September, while New Mexico recorded cheese production gains of 18.3%. South Dakota’s cheese production bumped up 12%, and Idaho was up 4.5%. Altogether, the western states made 8% more cheese than a year ago in September.

The Central U.S. made 1.2% more cheese with production in Wisconsin and Minnesota lower than year ago by about 1% and 5.6%, respectively.

The Atlantic region made about 1% more cheese in September, with New York up 4%, while cheese production in Vermont and Pennsylvania was lower than year ago by 11.3% and 3.3%, respectively.

 

 
     
 
 
 

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