Weekly Dairy Market Outlook

By Ken Bailey

Penn State University

January 21, 2005

Cash Cheese Prices Unbelievable

· CME block cheese rallies to $1.76/lb

· CME butter steady at $1.55/lb

· December milk up 1.0%

Cash cheese prices rallied this week at the Chicago Mercantile Exchange. Block cheese reached $1.7575 per pound by Friday; barrel cheese also rose to $1.7250 by week’s end. Average block cheese prices this week were up 30.7 percent from the same week a year ago. Butter prices were relatively steady at $1.5525 per pound.

There isn’t a real good explanation as to why cheese prices rallied this week. January is usually a slow month for cheese sales. But the market could have reacted to the news this week that the milk supply in December grew just 1.0 percent relative to a year ago. Then again, the market could be over reacting. The following quote from USDA is interesting:

“Many in the industry are concerned that current cash cheese prices do not reflect actual supply and demand conditions and a major correction will be needed.”

The market fundamentals would suggest that supply and demand is in balance. The milk supply did increase, although at a relatively modest rate. Estimated U.S. cow numbers fell 9,000 head between November and December 2004. And milk production per cow increased very little. Still, California production in December was up 4.6 percent, Arizona was up 6.8 percent, and Idaho was up 4.3 percent. Production for California could be down in January 2005 due to poor weather.

The CME Class III futures reacted in lockstep with the cash market. As of January 21, 2005 the Class III futures averaged $14.23 for all of 2005. If you believe that the milk supply will eventually increase due to these very high milk prices, then dairy producers may want to consider locking in some of their milk production. If a major price adjustment were to occur, at least part of a producers milk supply would be protected. These are very attractive prices (for dairy producers) in a year following record high prices!!!!!!!!

Want to get a friendly weekly reminder via email that my dairy outlook report is available? Subscribe to my email service. To subscribe, send a blank email to join-dairyoutlook@lists.cas.psu.edu.