guest editorial/opinion
Perspective: Market Commentary

Dave Kurzawski is a senior commodities broker with Downes-O’Neill LLC, Chicago. He contributes this column exclusively for Cheese Market News®.

Stable cheese prices are not a birthright by any means

New demand, a cheap dollar and protein production problems abroad has catapulted this otherwise quiet component of Class III milk. Since the whey price has been the driver of the Class III market as of late — thanks to a relatively stable cheese market — the aggregate focus has shifted. So long as whey prices stay high, cheese manufacturers will keep the plants running overtime to meet whey needs. So we’ll end up with more cheese, which will obviously keep the cheese price low. Right? Wrong.

Despite struggling with lower milk prices and higher operating costs over the past year, U.S. dairy producers have done a bang-up job of producing milk — until recently. The milk situation is becoming a weaker argument for market bears. The latest milk production report showed total U.S. milk production up four-tenths of 1 percent and milk per cow is unchanged from last month. Milk cow numbers are still 71,000 head above last year, but they dropped 3,000 head from January. Recent weekly cow slaughter numbers have been as high as 22 percent better than last year and those numbers were not in the report.

Add to the waning milk production picture a new round of the Cooperatives Working Together (CWT) herd retirement program. In early February the CWT program began accepting bids for the fourth dairy herd retirement program since 2003. Simply stated on the CWT website, “bids are accepted from any producer who has contributed, either directly or through his/her co-op, to the CWT assessment. Selected bidders are then required to commit their entire herds to slaughter.” In other words, the CWT program — in an effort to support the price of milk — raised money to remove cows from the milking herd. 54,000 head to be specific.

In addition to the CWT program, a cheap U.S. dollar has attracted some newfangled foreign cattle buyers to our shores. Saudi Arabian dairymen, for example, recently purchased approximately 10,000 U.S.-born bred heifers for shipment by boat to their sandy homeland. And since most dairy cows will have a total of two lactations during their career, the absolute removal of animals in this case will likely amount to more of a negative impact than we first think.

Foreign buyers and slaughter programs aside, the recent rally in corn prices is also doing its part to jeopardize the milk production picture for 2007. Corn prices have been over $3 per bushel since November of 2006 and while dairymen likely had some of their feed costs “locked-up” supplies of cheap corn are, in most cases, dwindling if not gone altogether. As a rule, dairymen can’t feed expensive grain for too long to cows producing low-priced milk. Eventually, producers cut the corn ration of their daily feed and as corn gets cut, the quality and volume of milk production suffers.

Futures markets are anticipatory in nature and the Class III market is no exception. Most premiums in the Class III market right now are heavily reflective of future expectations of higher whey prices. While whey is in new territory and its price moves are difficult to forecast, the true wild card has now shifted from whey prices back to cheese prices. Class III futures have yet to account for a near-term rally in the CME spot cheese prices, let alone projections of near 1.60 per pound in the fourth quarter.

Class III prices, which are trading above $15.00 per hundredweight — and in some cases $16.00 per hundredweight as of this writing — are not even taking into consideration the possibility that the CME spot cheese price may rally much above $1.40 in the near term (30 to 90 days). Sure, the deferred contracts are putting more risk premium into price due to conventional wisdom that points to a more gradual increase in spot cheese prices over the course of the next 6 or so months. A gradual increase is probably the way things should work given the current cheese fundamental picture — but the way things “should” work is not always the way things happen. Human nature is also part of the market.

Will $1.40 be a tipping point that calls nervous would-be cheese buyers to the market? I don’t know, but that $1.40 is now a level of resistance. Should we get above that point for any length of time and it would likely become a level of support. A $1.40 or higher CME spot cheese market is something that might materialize sooner rather than later. And it will have happened while everyone is looking at dry whey.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.