Weekly Dairy Market Outlook

By Ken Bailey

Penn State University

September 24, 2004

Implications of August Cold Storage Report

· Butter stocks down 33 percent

· American cheese stocks up 5 percent

· Commercial use up for butter, possibly cheese

USDA released the August Cold Storage report. These numbers have two implications. First, they report end of month inventories for butter and cheese. Second, one can make a forecast of commercial disappearance or sales.

First, let’s look at butter. Butter production is likely to grow in the months ahead as the milk supply improves. We have forecast that butter production for August will be 71 million pounds, up 0.4 percent from a year ago. USDA estimated that butter inventories, net of government stocks, were 163 million pounds. This level of inventory was 33 percent below a year ago. This rate of reduction has been the same since February this year, so the August inventory number should not have been a surprise to the industry. The estimated commercial use of butter for August is 121.7 million pounds, up 16 percent from a year ago. Looking at it a different way, commercial use of butter for the period June-August 2004 was up 12.8 percent from a year ago. This suggests strong butter consumption despite high wholesale and retail prices.

American cheese production for August is forecast at 304 million pounds, up 1.5 percent from a year ago. USDA’s Cold Storage report indicates American cheese inventories in August, net of government stocks, was 566 million pounds, up 5 percent from a year ago. This level of inventory is a surprise since inventories in July (revised) were 609 million pounds, up 11 percent from a year ago. These numbers suggest that commercial use of American cheese was weak in July and much stronger in August. Looking at the most recent quarter (June-August), we have estimated that American cheese commercial use was up an average 1.2 percent. What does this mean? If we assume USDA didn’t really have the inventory numbers correct each month, but did on average, then consumption has been relatively weak for the past three months. However, if we assume USDA is accurate with the monthly inventory figures, that implies commercial use of American cheese in August was up 12.8 percent, a very strong number. We can make a more accurate estimate once the Dairy Products report is released next month.

There was a lot of sales activity at the Chicago Mercantile Exchange this week. There were 55 carloads of 40-pound blocks, 7 carloads of barrels, and 33 carloads of butter that traded hands. The result was block cheese remained unchanged at $1.5675 per pound, but barrels and butter fell 2.75 cents and 8.25 cents per pound, respectively for the week. Given the ambiguity of the Cold Storage report, we can’t easily say what this means. However, looking at the dairy futures, one could conclude that the market is sensing optimism. In other words, someone out there is noting that sales may have been higher than what most of us had predicted.

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