‘Head-scratching’ price rise pushes cheese to record high

Issue Date: June 10, 2020
By Ching Lee

After milk prices plunged to recession-era levels as the nation went into lockdown due to COVID-19, dairy farmers are now watching cheese prices surge to a new record high as they contemplate how to react to the wild market volatility.

"We're all scratching our heads," Tulare County dairy farmer Joey Fernandes said. "We just went through probably the worst April and May. If (the market) holds, it'll be a huge recovery in the milk price."

Annie AcMoody, director of economic analysis for Western United Dairies, said the higher market prices haven't yet made it to the farm. Farmers' May milk checks will not reflect the current rally , she said, and will be lower than April, "which was abysmal." Because of the lag between markets and federal regulated milk prices, their June income could jump, she said.

A number of factors have led to strong demand for cheese hitting the market all at once, AcMoody said, giving dairy farmers a more positive outlook "after a news cycle that felt like forever focused on closures."

With many restaurants reopening, though at lower capacity, and retail sales, exports and government purchases of dairy products for food assistance still "trucking along," she said the search for fresh cheese has turned into a "frenzy," with bids to buy pushing prices higher.

On the farm, many producers have been trying to slow milk output by culling and drying cows, adjusting feed rations and other measures, with widespread adoption of plans by processors, creameries and dairy cooperatives to blunt increases in dairy herds and production, according to the National Milk Producers Federation.

What's been "eye-popping" about the current market rally, said Joel Karlin, market analyst for Western Milling in Goshen, is that prices for cheese in 40-pound blocks went from $1.60 a pound to a floor of $1, and then rebounded to a record $2.50 in the space of five weeks. Rarely have block cheese prices reached such high levels, he noted.

"That's incredibly volatile, very head-scratching," Karlin said. "I don't know how reflective of actual supply-demand fundamentals that move is."

Given the "dire news" about supply-chain disruptions and farmers having to dump milk at the height of the lockdown, he said there's question whether markets overreacted and prices fell too far—and whether they've now overcorrected, adding "the truth probably lies somewhere in the middle."

Dairy commodity prices began showing signs of stabilization in April, according to Cary Hunter, interim market administrator for the California federal milk marketing order. In California, milk pool numbers for that month indicated dairy farmers and their marketing handlers "made significant supply adjustments at the farm level to avoid dumping milk, when possible," he reported.

Of the 2 billion pounds of milk pooled in April, fewer than 16 million pounds, or less than 1%, were discarded, he noted. Of that 16 million pounds, about 85% was raw milk dumped at farms, Hunter added, with the remainder composed of milk discarded due to processing issues, packaged route returns and milk used as animal feed.

Analysts and people in the dairy business tend to agree that current high cheese prices are unlikely to be sustainable, especially with U.S. prices now above global levels, which would eventually make U.S. cheese less competitive and hurt export volumes, AcMoody pointed out. Karlin added he "wouldn't be surprised" if the market surge is "on its last leg" and prices retreat in the next week or so.

There's also question as to whether current prices would lead producers to reverse course on culling and other activities meant to quell milk flow, Karlin said, adding, "the best cure for high prices is high prices, because that stimulates production and stifles demand."

Because many producers "made tough decisions" during the pandemic by removing cows and drying them early, Fernandes said, "there's not a real big ability to respond" to the immediate movement of cheese by "turning around and cranking out more milk." Production also tends to drop during hot-weather months, he noted.

"I think there's a different mentality," he said. "(Farmers) are not going to go out there and expand, spend money on cattle or try to push more milk production. They're just going to be happy to heal the wounds with some of this (government) aid that's coming, that will keep them going sustainably milking cows."

If anything, he added, some dairy farmers may be looking for an opportunity to hedge some of their milk, if they didn't do it before, and take advantage of other risk-management tools.

Based on futures-market prices, the NMPF estimates the market outlook for the rest of the year has improved by about $1.50 per hundredweight of milk in the past month, noting dairy farmers "still have a few tough months to endure of milk prices that are lower than what they expected before the pandemic struck." But the federation added, "the light at the end of the tunnel appears real."

Because he ships his milk to a cooperative that makes mainly butter and powder, Tim Coelho, who operates dairies in Merced and Madera counties, said he likely won't see the higher-price benefits from the current market rally as quickly as producers who ship to plants that make cheese.

As someone who's been looking to get out of the dairy business, Coelho said he thinks other dairy farmers are also "waiting for it to get good again and then exit the dairy industry."

He noted he participated in the federal Dairy Margin Coverage program by insuring his margins at $9.50 per cwt. on 5 million pounds of milk, and will be receiving payments from the program for the next three months, but he said he doesn't plan to do more hedging than that.

With cheese prices at levels that are rarely sustained, Karlin said he "strongly" recommends dairy farmers look to risk-management strategies to at least lock in prices "in case things turn around" and markets sour again.

"You can't wait around for it, because prices have rebounded," he said. "Who knew in December what was going to happen down the road? You're given a second chance, just like George Bailey."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.




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