Discover how soaring cheese prices and tightened milk supply are driving sharp margin improvements for dairy producers. Are you ready to capitalize on these trends?
CIH provides this analysis in its most recent dairy Margin Watch report. This bi-monthly report focuses on the factors affecting forward profit margins in the dairy industry and strategies producers can use to protect profitability. If you have questions or would like more information, please contact CIH at 1.866.299.9333 or mail@cihedging.com.
The dairy sector experienced a notable enhancement in margins throughout the first half of May, propelled by a significant rise in milk prices, which effectively counterbalanced the unwavering strength in feed markets. This period of margin expansion is striking, primarily driven by an extraordinary rally in the spot cheese market, where both blocks and barrels skyrocketed by approximately 33% since their late March lows, driven by strong export demand. As a consequence, Class III Milk futures have soared above $20/cwt, up from just under $17/cwt in mid-April. This sharp ascent has significantly narrowed the differential with Class IV milk, an essential factor likely to mitigate deploying effects and bolster milk revenues for producers.
Analyzing production and export trends reveals a year-to-date reduction in milk production, which led to a decrease in cheese production during Q1 compared to the previous year. This shortfall was pivotal as it, coupled with relatively low U.S. cheese prices, spurred export demand. In March, U.S. cheese exports achieved an unprecedented 110.3 million pounds, marking a 20.5% increase from the previous year and establishing a new historical record, surpassing the June 2022 peak by 13 million pounds. While these competitive cheese prices initially supported the surge in demand, the recent hike in spot cheese prices has obliterated the U.S. price advantage, potentially restraining future demand.
The ongoing spread of avian flu introduces a new layer of complexity, having affected herds across 42 dairy farms in 9 states. While it’s difficult to gauge the precise impact on milk production, recent data suggests a tightening in milk availability within the Central region. This is further supported by dairy processors offering an unusual premium of 50 cents per hundredweight over the Class III price for spot milk during the spring flush season.
“Competitive cheese prices initially bolstered demand, but the recent spot cheese rally has eliminated the U.S. discount, potentially dampening future demand.”
Key Takeaways:
- Dairy margins saw a significant boost as increasing milk prices outpaced the persistent rise in feed costs.
- The surge in the spot cheese market, particularly in blocks and barrels, played a pivotal role in improving margins.
- Class III Milk futures exceeded the $20/cwt mark, narrowing the margin gap with Class IV milk, potentially limiting depooling.
- U.S. cheese exports hit a new high in March, reaching 110.3 million pounds, an increase fueled by previously competitive prices.
- The rise in cheese prices may impede future export demand as the U.S. loses its price advantage.
- Milk production has decreased year-to-date, exacerbating the decrease in cheese production and straining milk supply.
- The spread of avian flu has further strained milk availability, prompting unusual premium prices for spot milk during a typically abundant season.
- Producers who adjusted their milk hedges previously have benefited, and new positions provide an opportunity to capitalize on the improved margins.
