The April Class III price reached a 2019 high of $15.96/cwt. This was driven by a significant increase in cheese prices. Butter and butterfat prices were unchanged. Dry whey prices decreased from the prior month, causing other solids pricing to fall.
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| Chart I - Dairy Pricing Dashboard |
The increase in the Class III price (Chart II) is directly tied to the price of cheese. The Class III price of $15.96/cwt. is not an outstanding price. However, the increase in the Class III price is welcome news for producers who have been dealing with $14 milk. This post will review some of the underlaying analytics that provide some clue as to the sustainability of the current Class III price. The CME futures market has recently been showing small increases in the Class III price in coming months.
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| Chart II - Class III Milk Price |
The improvement in Class III pricing is no doubt based on the "no growth" cheese production shown in Chart III. During the first quarter of the year, cheese production matched the prior year levels almost exactly. Cheese production has typically increased every year to meet the increased demand. However, in Chart III, the lines for 2018 and 2019 overlap.
Cheese consumption has been growing at a rate of about two percent per year and production has typically grown to meet that demand. However, especially in 2018, cheese production grew much faster than consumption. That resulted in increased inventories and drove down cheese prices.
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| Chart III - Cheese Production |
Chart IV below shows the cheese inventory levels for the current and prior four years. Cheese inventories have grown significantly in each year.
What is amazing in 2019 is that the high inventory of cheese continued to grow, even with no increase in production. In January, cheese inventories grew six percent over the prior year. In February and March, cheese inventories grew by four per cent over the prior year. These growth rates are well above any increases in domestic consumption.
Exports of cheese were up in the first quarter of 2019 by 10% over 2018, adding a small amount of additional cheese "disappearance," but it was not enough to slow the inventories growth.
The analytics support only one conclusion. Cheese production in 2018 was so far above demand, that even though there are no further increases in production in 2019, further reductions in cheese production will be needed to balance supply and demand.
Higher inventories typically mean lower prices, but the NASS cheese price actually rose in the first quarter of 2019. Based on the continuing growth of inventories, the sustainability of the higher cheese price is questionable.
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| Chart IV - Cheese Inventories |
Chart V below shows the long-term NASS price of cheese. It always looks identical in shape to the price of Class III milk price shown in Chart II as the two are closely linked by the Federal Order pricing formulas. The only rational behind the current increase in the NASS cheese price is that the current lack of growth in cheese production will help reduce the bloated cheese inventories in the long-run.
The current price of cheese is the highest since September of 2018, seven months ago. While a cheese price at $1.65/lb. is still low, it is encouraging to see at least this increase. However, as mentioned above, the sustainability of this higher cheese price, with the inventories still growing, is questionable.
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| Chart V - Wholesale Cheese Prices |
Butter supply and demand and pricing analytics are very different from the cheese analytics. Butter prices (Chart VI) have been extremely stable through 2018 and 2019 YTD. During the last 12 months, butter prices have maintained a very stable price level around $2.26/lb., with only a two percent variation.
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| Chart VI - Wholesale Butter Prices |
The growth in domestic butter consumption and limited supplies (Chart VII) have kept prices relatively high. Supplies of butter have remained lower than the prior year for the first quarter of 2019.
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| Chart VII - Butter Inventory |
One of the factors that is keeping butter prices from rising, is that the increased domestic consumption is partially fueled by imports of "Irish Butter", not domestic butter. That allows a stagnant inventory level to meet demand. Futures pricing suggests little change in the price of butter.
SUMMARY
The Class III milk price is primarily determined by the price of cheese. In the last few years, there has been overproduction of milk and that overproduction has gone primarily into cheese, bloating inventories and lowering prices. While it is refreshing to see that there are no 2019 increases in cheese production, the increasing cheese inventories indicate that there is still a need for further reduction in the milk supply and cheese production.
There is risk to any further increases in cheese pricing and in turn the Class III pricing. If further decreases in the milk supply and cheese production do not occur, the oversupply will continue to bloat inventories and keep prices low.
As mentioned above butter prices will likely remain stable for the near future.
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