“Morality is a private and costly luxury.” -Henry Adams
The key market takeaway from the annual IDFA Conference, which wrapped up yesterday in Phoenix, was no one is quite sure of a market direction. Frankly, more of the same sentiment means the disparity between Class III and IV milk pricing ought to continue. For now. In other words, IDFA attendees are largely bearish current demand but bullish (or at least concerned about) future milk supplies.
Class III and Cheese futures markets are ‘giving up the ghost’ this week. Deferred contracts sold off making new lows yesterday as the forward curve adjusts lower after watching the spot market continue to trade in the $1.40s (on a block/barrel avg basis). Volumes surged on the decline as did open interest. Over 3,300 Class III and over 900 Cheese contracts changed hands yesterday and open interest rose by 433 and 225, respectively. It should be noted that over 2,700 Class III traded in the February and March contracts alone, which looks to be mainly driven by rolling February positions into March. Also, note the lead month of February has yet to make new lows – all the fresh downside was seen on more deferred contracts into 2nd half of 2024.
Meanwhile Class IV milk was largely stable yesterday as Butter futures spiked higher heading into yesterday afternoon’s double header Milk Production and Cold Storage report release. Spot butter gained 3.25 cents to close at $2.5775 and the futures gained ~1-2.5 cents on over 300 contracts of trade volume. Perhaps it’s the buyers ‘giving up the ghost’ in this market. Perhaps there was pre-report positioning (and the Cold Storage report was bullish butter, see below). End-users remain dedicated to getting price coverage in 2024 keeping price action buoyant this week despite a myriad of conversations about “plenty of cream available” we had over the past few days. NFDM futures sold off yesterday on 388 contracts as the forward curve there works off some of the premium against a very stable spot price.
US milk production continued to be constrained in December. Headline U.S. milk production was quite close to our pre-report expectations falling 0.3 percent YoY. Both cow numbers and milk per cow came in fractionally below our expected numbers. Western states continue to struggle growing milk production and in December we added Idaho to that list of negative milk production growth. Q4 milk production fell 0.6 percent from Q4 2023.
The report doesn’t reveal any major surprises for the dairy complex markets. Milk production remains somewhat subdued, but milk components remain strong. There are signs of financial pain on US dairy farms, but overall supplies of fresh milk remain adequate to meet current demand. A wider view of current conditions, however, reveal a
lack of growth in the US cow herd and, perhaps more importantly, a lack of incentive to change that trend.
US markets may shrug this one off. Weaker cheese demand continues to weigh on Class III and Cheese markets while Class IV remains rather stable at higher levels. What this report won’t do is weigh on the markets. For that we need to continue to see lackluster demand.
With the December Milk Production report coming in relatively neutral, the Cold Storage report had a few surprises . Total cheese stocks 6.5M lbs. higher than forecast will left total stocks slightly below year ago levels at –0.2%. When we released out forecasts we mentioned it wouldn’t be a huge shock is stocks came in heavier given the weakness in spot prices. American cheese stocks came in 10M lbs. above forecast while other varieties were 26M below. We remain the cheapest cheese in the world market so that should help to clear more cheese exports through December and January.
The big surprise came in butter with stocks coming in 36 million lbs. below forecast which puts stock roughly 8% below year ago levels. After the report futures started to trade above settlement prices so expect butter futures to open higher tomorrow. This is the lowest we’ve seen stocks since 2021 and chances the dynamic a bit for 2024. Cream demand has loosened up a bit but overall demand of butter has stayed rather steady after the holidays but could stronger than originally anticipated.
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