Historical marketing events are happening in dairy right now. Class III and Class IV have drifted apart and are now at the widest spread seen in 14 years. Meanwhile, butter has fallen below the price of cheese, a rare market anomaly, signaling an imbalance in market prices.
U.S. dairy prices are struggling to find ground, amid low demand and plenty of production to meet needs. Exports have been helpful, despite an ongoing trade war with China, but world dairy prices have drifted lower for the third month in a row. Among all the negative news, we have seen a few rare occurrences take place, giving opportunities to a few and uncertainty of where prices will go from here.
Butter fell to $1.605 last week, creating an inversion in the market where butter is trading below the current price of cheese at $1.70 for blocks, and barrels closing last week out at $1.71. This is rare occurrence not seen in several years.
Relatively high cream production, with lower seasonal orders and lower food services demand, on top of a world price decline are to blame for butter’s price demise. Seasonal retail orders, while picking up, haven’t materialized as normal ahead of the holidays and cold-storage inventories have remained heavy due to the lack of buying interest. It is expected that inventories will pull back slightly but not nearly the drop seen in a normal year for this season.
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Cheese markets have remained a little bit of a bright spot in a dim marketing situation. They have held steady or drifted lower at a slower pace than the rest of the dairy industry prices. Giving way for the inverted butter to cheese price. There has been a slight increase in processed and aged cheese with decent export demand, shipped to Mexico, South Korea and Central America.
In the meantime, the Class III and Class IV price have drifted apart, coming in at a $2.47 per cwt spread between the two classes last week, the widest seen since 2011. Class III has been impacted by cheese prices, while Class IV has fallen with the decline in butter and powder prices.
This wide spread between classes affects pooling decisions under the Federal Milk Marketing Orders (FMMO) and many handlers have started to “de-pool” their Class IV milk to keep more value within their own system. The imbalance certainly raises questions about potential adjustments to the FMMO modernization proposals.
Farmers in cheese heavy regions are benefiting slightly, relative to those producers in higher butter/powder regions, but overall, most producers are concerned about margins everywhere. Without a clear demand rebound, the market’s path forward depends on an uptick in holiday buying or a decline in world production.
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