February Kicks Off With Commodity Price Fluctuations

The T.C. Jacoby Weekly Market Report Week Ending February 5, 2021

Prices fluctuate as new market information collides with the realities of supply and demand. Reports indicate that milk production continues to exceed prior year levels and is growing seasonally as spring approaches.

Not even Punxsutawney Phil’s declaration of an extended winter could freeze out the dairy markets this week. Most commodities kicked off February with price fluctuations as new market information collided with the realities of supply and demand. Reports from across the country indicate that milk production continues to exceed prior year levels in most places, and is growing seasonally as spring approaches. USDA’s Cattle report released late last week confirmed that the national milking herd at the turn of the year totaled 9.44 million head – the largest number since 1995. However, the number of heifers expected to calve declined to the lowest levels in over a decade, indicating that there are fewer replacements waiting in the wings.

 

USDA’s Dairy Products report, published on Thursday, confirmed suspicions that plentiful milk supplies led to ample dairy product production in December. Class IV products in particular capitalized on the available milk with butter production hitting a December record of 205.5 million pounds, representing a year over year increase of 11.8%. Dryers were also clearly active in December with combined production of nonfat dry milk (NDM) and skim milk powders (SMP) up 6.8% for the month.

On the Class III side, cheese manufacturers increased production by 0.5%, demonstrating a preference for cheeses that can be put into ageing programs. Thus, Cheddar production climbed 1.2% while Mozzarella production slipped by 2.8% year over year. The abundant whey stream provided by the cheese vats pushed dry whey and whey protein isolate production up 2.3% and 15.7%, respectively. Manufacturers indicate that spot milk can still be easily secured at a significant discount to class prices, though the number of available loads is easing. Thus, strong dairy product production is likely to persist into the coming months.

 

The CME Cheddar block market was unsettled over the course of the week. After finding some traction early on, block prices slipped on Wednesday and Thursday, falling as low as $1.535/lb. before heating up on Friday. A 10.5¢ jump during Friday’s trade erased the early losses and brought the price up to $1.64/lb., an increase of 6.5¢ versus last Friday. Barrels staged a more measured ascent, rising steadily through the week to finish Friday’s session at $1.50/lb., 11¢ higher than last week. The trade was active with 14 loads of blocks and 19 loads of barrels changing hands over the five days. Cheese demand continues to be hurt by a lack of foodservice activity though retail sales remain resilient.

Spot butter market observers are also likely suffering from whiplash as a 3.5¢ decline at the CME on Monday was followed by an 8.25¢ rise on Tuesday. A strong result for fats at the Global Dairy Trade auction likely caused the rise which was sustained Wednesday. By Thursday, however, the gains began to be whittled away as the realities of the heavy production and inventory situation weighed on the market. Cream multiples have improved slightly, particularly as ice cream demand has picked up in recent weeks. Nevertheless, churns are keeping busy schedules and butter is reportedly plentiful. CME spot butter ultimately finished the week at $1.2675/lb., still 2.25¢ higher than the prior Friday. U.S. trade data shows that butter exports in December were stronger than they have been in years, due to renewed interest from Canada and Mexico, as well as a record large shipment to Bahrain. U.S. product remains at a significant discount to global competitors and if standardization issues can be overcome, the export market may help to clear some of the inventory.

Unlike butter, exports of NDM were weaker in December year over year, even as stronger shipments in earlier months pushed annual exports up 15.6% versus 2019 after adjusting for the leap day. Logistical obstacles, namely a shortage of containers, likely resulted in lower volumes moving abroad. Domestically, there is a lot of condensed skim available and dryers are working hard to balance milk supplies. At the CME, NDM prices slid steadily through Thursday before bouncing back and adding 2¢ during Friday’s trade. NDM closed the week at $1.12/lb., down 5.25¢ from last week. It was a very active week for NDM trade with a record 33 loads changing hands on Wednesday.

Bucking the trend, spot whey markets remained unchanged all week at 53.5¢/lb. with only one load moving. Though container availability is also an issue for whey traders, exporters were nevertheless able to ship 107.2 million tons of whey products during December, an increase of 27.5% versus the same month last year. Sustained buying interest from China pushed 2020 cumulative whey exports up by 23.4% compared to 2019. Though heavy cheese production has resulted in an ample whey stream, a preference for higher value protein products continues to keep supplies of dry whey in balance.

Milk futures were mixed for most of the week though Friday’s spot cheese gains drove Class III contracts decisively upwards. The APR21 and MAY21 contracts settled limit up on Friday, breaching the $17/cwt threshold. Most Class IV futures contracts softened during the week until

finding some life on Friday. Nevertheless, it was not enough to overcome earlier losses and most 2021 contracts finished about a quarter lower than last Friday’s settlements.

In the soybean market, while nearby futures contracts have eased somewhat, another round of concerns about the South American harvest is causing worry further into the future. After months of concerns about dry weather it is now, ironically, heavy rains that are threatening to delay the soybean harvest in Brazil, pushing prices upward. Corn prices were fickle over the course of the week, but nearterm contracts ultimately settled on Friday close to prior week values. Feed concerns remain a significant threat to producer profitability in 2021.

Original report is at https://www.jacoby.com/market-report/february-kicks-off-with-commodity-price-fluctuations/