Guest Columns

Perspective:
Dairy Markets

Welcome to budget season:
Will volatility decline next year?

Lucas Fuess

Lucas Fuess is the director of dairy market intelligence at HighGround Dairy*, Chicago, a firm specializing in dairy hedging, risk management and market analysis services. He contributes this column exclusively for Cheese Market News®.

September is here! Students are returning to schools, football is on TV, summer vacations with friends and family are wrapping up until next… oh…

It is no secret that this year has been unlike any other that any of us has ever witnessed. There have been challenges (and opportunities) large and small to navigate, and the pace of change can be overwhelming.

Throw in political unrest and a presidential election, and the uncertainty abounds. The cheese market has not slowed as fall weather has crept into the Midwest: As of mid-September, the Chicago Mercantile Exchange spot block Cheddar market has made a run past $2.30 per pound, the highest price since late July in the weeks following the fall from the July 13 high. The block/barrel spread has widened considerably and continues to hit new records, surging past a whopping 70 cents this week. Market volatility has been intense this year, and it is certainly showing no signs of slowing. As companies set 2021 budgets, debate bullish and bearish factors and finalize forecasts, will 2021 be a more normal, navigable year for market participants?

Unfortunately, it is unlikely that 2021 will return to normal. Remember those “normal” years when the cheese monthly average for all 12 months was in just a 30-cent range? The pandemic continues to rage across the U.S. and parts of the globe. Uncertainty and wild-card factors are here to stay for the time being. It will be difficult to forecast markets with so many volatile factors at play. However, while volatility will persist, HighGround expects lower cheese prices are on the horizon and has a more bearish viewpoint for next year opposite this summer’s record-high cheese values.

From an economic standpoint, the U.S. economy is struggling and will not be on solid ground for many years.

The Fed has indicated that interest rates will remain near zero until at least 2023. Unemployment is high and consumer confidence sank to a new pandemic low in late August, faring even worse than the previous dismal figure at the height of the economic shutdown in April. Economists pegged the expiration of the additional unemployment benefits as a key reason for declining confidence. Tourism is weak and airlines are preparing to furlough additional workers when the CARES Act financial support expires in October. OPEC extended its forecast for lower global oil demand to well into 2021. To the fear of restaurants and consumers alike, the weather is cooling across parts of the northern U.S., foreshadowing the impending winter where outdoor dining will be impossible across parts of the country, forcing consumers who are uncomfortable with indoor dining back to grocery stores and home-cooked meals for months.

In addition to these generally bearish macro factors, there are key structural reasons why HighGround expects lower cheese prices could be on the horizon. The lack of consensus in Washington on a new stimulus package is concerning for dairy demand. The first stimulus package (the CARES Act) passed at the beginning of the pandemic provided cash to American households that boosted spending, including on dairy products at retail. Many Americans received a $1,200 stimulus check, with additional cash to families with children, plus the federal government increased unemployment benefits by $2,400 per month. This was a significant amount of cash moving into American bank accounts. With unemployment high and the economy struggling, the lack of a second stimulus bill that provides additional cash to households could mean that dairy demand will decline soon. The last time per capita cheese consumption declined in the U.S. was during the 2008/09 financial crisis; a poor economy through the winter months would be bearish for dairy prices.

Second, a massive block Cheddar plant is opening in early 2021 and will boost block availability by over 800,000 pounds per day. The joint venture project between Glanbia, Dairy Farmers of America and Select Milk Producers is structured similarly to the Southwest Cheese plant in Clovis, New Mexico. The St. Johns, Michigan, plant was originally scheduled to open next month, but Glanbia recently reported the plant would be operational slightly later than planned due to the impact of COVID-19 (see more on this project in CMN’s “Plants in Progress” section this week). Regardless of when milk flows into vats for the first time, the plant will likely scale quickly and be a significant factor that limits the market upside in 2021.

Finally, the wild card of government spending will not be gone next year. Thankfully, the 2021 outlook is not entirely bearish! The USDA Farmers to Families Food Box program has been an overwhelming factor driving cheese prices this year. So far, the Trump administration has been willing to spend billions of dollars on the program to support dairy markets. Currently, the box invoicing and delivery rounds do not extend past this year, but the overall program is structured so that it could be continually extended into 2022. HighGround opines that this program could be an easy way for the government to support dairy and agricultural markets into next year, regardless of which administration gains control of Washington in January. While the current $4 billion allocated to the program seems like a large sum, it is just a tiny amount of a $2 trillion-plus spending package and has proven to drive cheese prices higher. To an administration looking to secure dairy farmer votes in swing states, a few billion dollars to drive cheese markets higher seems like a small sum to spend and could develop into longer-term government agricultural policy.

Ultimately, the markets work, and prices rise and fall based on simple economic factors. The difference now is the staggering amount of information to digest and the stunning speed at which fundamentals can shift. While it is certainly possible that the government will continue to spend money to keep prices elevated, overall factors lean bearish into 2021, and market participants should expect lower cheese prices into the new year.

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 authors 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.

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