Current Cheese Prices May Be “Overcooked”

March 25, 2014 – The current record cheese price levels are probably a little misleading, according to FC Stone’s Bill Brooks. Dairy farmers have never seen prices like this

Bill Brooks, FC Stone

Bill Brooks, FC Stone

before, with CME 40 lb. block cheese trading at $2.4325 and 500 lb. barrels at $2.3775.

“We are in a tight market,” Brooks warned on Tuesday’s DairyLine Radio program.  “We haven’t seen a trade for block cheese since February 20th.”

Prices continue to set records because of the world market, weather, feed prices and featured dairy products in store shelves from the last football season and now March madness. But those are going to go away quickly, according to Brooks.

“That’s going to negatively impact our demand and hopefully not make the down-turn potentially worse than what we might anticipate,” he said. Brooks has that feeling that the markets are a bit “overcooked.”  

Even though inventory levels are below a year ago, we’re only three days below the amount of available supply we have in cold storage inventories. However prices are 60 to 70 cents above a year ago. U.S. prices are also 10-30 cents above international prices.

“We’re going to lose that competitive factor that helped us ship a lot of product offshore,” Brooks said. “But the market is always right; we just have to figure out the timing of when it is going to go in the other direction.”

Some producers have put in some risk management positions, like forward contracting with their milk buyer and some are also locking in feed prices. Both have started to work their way higher.

“We are starting to see dairy producers look at that,” he said. “They are being pretty judicious with those positions because they do see this market is continuing to go up.”

It’s more difficult to hit the exact high of the market when trying to sell milk in futures, options or a forward contract. So producers don’t want to miss it by too much and leave money on the table.

Weather, feed costs and feed quality are reasons to layer in protection on margins, according to Brooks. Producers are also looking at a new risk management tool from the new farm bill, and are learning how to implement margin insurance that will protect them against the massive price fluctuations that we seem to have in agriculture.

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