Bob Cropp and Mark Stephenson

Bob Cropp, left, and Mark Stephenson of the University of Wisconsin.

The U.S. dairy industry has had large inventories of American-style cheese over the last couple of years, but they’re starting to shrink. That and other factors should help support milk prices, according to economists at the University of Wisconsin.

There’s nothing that feels tight yet, but those cheese stocks are in a comfortable zone, Mark Stephenson, dairy economist at the university, said in the latest “Dairy Situation and Outlook” podcast on Friday.

The latest report shows American-style cheese inventories, which is mostly cheddar, were down 7.1% year over year at the end of December, Bob Cropp, fellow dairy economist at the university, said.

There’s been a little activity in the markets, probably reflecting that tightness, Stephenson said.

“So I think that’s somewhat bullish for prices,” he said.

The cash cheddar market has been volatile, with barrels at $1.39 a pound in October. That price was $2 in November and December before dropping to $1.47. It’s come back to $1.63, Cropp said.

Blocks had been over $2 a pound until Nov. 12 and got down to $1.23. But with the latest stocks report, they jumped back up to $2, he said.

More good news came this week with the milk production report, he said.

U.S. cow numbers didn’t increase from November to December, although they are up 22,000 head from the low point in August. Production per cow was only up 0.8%, perhaps reflecting some of the forage quality problems, he said.

Combined with slightly fewer cows than a year ago, milk production was only up 0.7% year over year, he said.

Both the cheese market and milk production have pushed the futures market for Class III milk, and prices have come up substantially, he said.

He doesn’t know if they’ll stay there, but farmers might want to take advantage of the prices in the futures market, he said.

“They’re pretty attractive right now, a lot better than it was 10 days ago,” he said.

Futures prices for Class III milk deteriorated a month or so ago, but they’ve been roaring back the last few days, Stephenson said.

They were below $17 per hundredweight 10 days ago, and they’re now $18 by February or March and sitting in the high $17s and $18s the rest of the year, Cropp said.

With strong cheese exports, a good domestic economy and soft world milk production, he’s expecting good milk prices in 2020. He thinks the Class III price will average $18.15 to $18.20 for the year — higher than the $16.96 average in 2019.

As for now, cheddar inventories are finally down to a comfortable level, product is still readily available, it’s past the major buying season, buyers can purchase as needed and there’s no price direction, Stephenson said.

“I think the next big piece of information the markets will be looking for is the (spring milk) flush,” he said.

If it’s a big flush, cheese buyers will sit back and wait for prices to go lower. If it’s not a big flush, they’ll step in and start buying early, he said.

Cropp said he doesn’t anticipate a big flush given feed quality issues.

“So I’m staying fairly optimistic,” he said.

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