Posted: Wednesday, September 26, 2012 8:59 AM
An increase in cheese prices may portend higher milk prices, analysts say.
The cash block cheese price hit $2 a pound on the Chicago Mercantile last Thursday and is still holding. Block cheese rose 12.75 cents a pound for the week ending Sept. 21 from the previous week, and barrels rose 13.25 cents to $1.96 a pound.
Analysts say the jump in prices is a result of lower cold storage supplies, higher dairy cattle slaughter rates and an expectation of lower milk production, which in turn could cause milk prices to increase.
Dairy product supplies are tighter than usual for this time of year, said Jerry Dryer, publisher of Dairy and Food Market Analyst.
Cheese inventories were reduced in August more than usual, he said. The American cheese inventory is around the five-year average, but other cheeses are at a four-year low, he said.
"I think things are in balance to very snug. We're on the downside of the production season and on the upside of the demand season," he said.
American cheese stocks were near normal on Aug. 31 but were reduced by 20 million pounds, compared with a typical reduction of 7.4 million pounds.
Other cheese stocks were reduced by 20 million pounds, which is double the typical amount, he said.
The inventory data is telling the market that production was lower in August, demand was stronger, or both, he said.
Higher weekly average prices have customers placing orders, making cheese supplies that much tighter, and his long-range forecast has cash cheese prices at or above current levels through April, Dryer said.
But "we may go too high too fast," he added.
Milk production for August showed the first year-over-year drop in 31 months, but that news is a month old and has already been digested by the market, said Robin Schmahl, a commodity broker and owner of AgDairy.
The more relevant news was the slaughter report that came out Sept. 21. That report shows producers are cutting back, and that's of concern to cheese buyers wanting to fill orders, he said.
The holiday purchasing season is on, and buyers have become more aggressive. That is generating more excitement with buyers, who are now working to outbid each other, he said.
That causes a "little bit of exuberance and fear. How far that will take it (the price) I don't know," he said.
While retail orders are fairly strong, he doesn't get the feeling cheese supplies are tight, he said.
Heavy culling, a shortage of feed and high feed prices could be fueling buyers' exuberance, but it could be irrational exuberance, he said.
The typical September-October holiday buying could be extended into November -- unless the market prices itself out of demand -- because the milk supply isn't going to rebound as much with fewer animals, he said.
Both the slaughter and cold storage reports released last week were fairly favorable to the dairy market, said Mary Ledman, market analyst with the CME Daily Dairy Report.
Dairymen sent 270,000 cows to slaughter in August. That's 1,000 more cows per day than the July slaughter, she said.
And American cheese stocks showed the strongest drawdown for August since 2006.
"I would say it's bullish or at least supportive to the current dairy market," she said.
But 22 loads of blocks and 8 barrels of cheese traded on the CME's cash market last week, and if people really thought the market was tight they wouldn't be bringing product to the market, she said.