March was not a good month for cheese prices. Therefore, it was not a good month for protein prices. And therefore it was not good month for Class III milk prices.
If there is any doubt concerning this relationship, the graph below should eliminate that doubt. Class III milk prices are directly related to cheese prices.
If the graphical proof is not convincing, the mathematical proof was reviewed in the April 23 post to this blog.
Because cheese prices fell in March; protein prices took a major hit, falling to $2.13/lb.
And, Class III milk prices fell to $12.78/cwt.
By comparison, butter production, butter inventories, and butter prices have been "in control" with reasonable production, relatively low inventories, and therefore positive prices. Butterfat increased in value to $1.53/lb. in March.
In spite of the negative news for protein and the positive news for butterfat, protein payment still makes up the majority of the milk check. At the March prices, protein still makes up 50% of the milk check and is the most lucrative component to maximize.
Cheese prices are mostly influenced by supply and demand. The reported volume of cheese inventory is significantly higher than historical levels. The benchmark American cheese cold storage holdings are extremely high. The graph below shows the level of total natural cheese stocks in the U.S. The late 2009 and early 2010 numbers are well above the trend line, signaling a "bubble" of cheese holdings that can only be corrected by increased demand or decreased production.
Some people disagree with the interpretation of the statistics on cheese inventories. NASS collects this data and because the wide survey methodology can add new warehouses not in the prior statistics, some claim that the increase is only a result of new cheese holding sources. The Methodology and Definitions used by NASS can be reviewed at the link in this sentence.
This explanation seems improbable. Although export numbers are not yet available for 2010, the stronger U.S. Dollar and the weaker New Zealand dollar suggests that cheese exports are down and cheese imports are up. In 2008, when milk prices peaked, U.S. consumer prices for cheese increased dramatically which had a negative impact on domestic consumption. Retailers are quick to raise prices, but traditionally slow to reduce prices.
It would appear that the cheese "bubble" will have to be resolved before cheese, milk protein, and Class III prices recover. Cheese production was lower in February. Even with lower production, the "bubble" will take months to deflate therefore keeping milk prices low at least through the second and perhaps the third quarters of 2010.
