Dairy markets bullish as summer heat settles in
By CAROL RYAN DUMAS
Dairy commodities prices all marched higher on the CME cash market for the week ending July 19, with block cheese up 7.25 cents per pound, barrels up 9 cents, butter up 3 cents, and Grade A nonfat powder up 2.5 cents.
Strong global prices, the effect of summer heat on milk production and seasonal demand were all at play in last week's bullish pricing, analysts say.
Those factors will continue, and prices are poised to move higher, said Eric Meyer, president of the dairy division of Chicago brokerage HighGround Trading Group.
HighGround is expecting markets to rally in the third quarter, Meyer said.
Global dairy prices were driven higher by a late-season drought in New Zealand and rose in the second quarter, at a time when those prices would typically bottom out, he said.
The total weighted index at Global Dairy Trade Auction jumped 46 percent in early April at the height of New Zealand's drought. Although it rolled back 14 percent between May 1 and June 4 as record-high prices harmed demand, the index has increased nearly 7 percent over the last three auctions, moving 4.9 percent higher in the June 16 auction, he said.
HighGround views those price increases in most dairy commodities as bullish in the short term to the U.S. dairy market, particularly to nonfat dry milk prices, which will lead to spillover strength in cheese and dairy, he said.
The recent GDT trade weighted increase is its largest bi-weekly increase since the height of New Zealand's drought, and only butter and casein prices moved lower at the auction but remained at historically high levels. In addition, market reports show steady to higher dairy product prices in Western Europe and across-the-board price increases in Oceania, reported Sabrina Sharp, analyst with the Daily Dairy Report.
While USDA's June cold storage report showed year-over year growth in cheese stocks, they were not as heavy as industry had anticipated. Declining prices in June must have gotten buyers off the sideline, Meyer said.
While American-style cheese stocks were up 6.5 percent in June over June 2012, month-over-month stocks declined 1.3 percent in June, only the third decline from May to June since 2000, he said.
HighGround views that as a bullish short-term indicator that cheese demand has likely resurfaced, and the stronger-than-anticipated USDA June milk production report suggests cheese production in June was strong, he said.
Another factor in the analysts' bullish short-term forecast is that U.S. milk production typically decreases in the third quarter, and cows are already starting to endure the heat stress of high temperatures across most of the country, he said.
That anticipated reduction in milk production, due to heat from coast to coast, spurred Class III milk futures to high gains the week ending July 19, with the September contract adding 68 cents per hundredweight on Tuesday, and 27 cents on Friday to settle at $19.04 for the week, Sharp reported.
The futures markets promise larger milk checks and lower feed costs this fall, and improved margins could lead to stronger milk production, particularly in the U.S. and Europe if the weather allows, she said.
"However, end users seem content to secure (delivery) deferred dairy products at historically high prices, revealing uncertainty about global milk production and dairy inventories this fall," she said.