Cameron S. Thraen
AED/ The Ohio State University/ OSUE
Dairy Economist / Extension Specialist
What is going on here? What can I say! The cheese market is incredible. Repeat after me: "It has been very, very good to me." The 40-pound block cheese price has continued to sail to new heights this summer. Back in late May it looked as if all was lost but then - walla - the price was off and running, increasing from a measly $1.21 per pound to a record $1.9725 on August 20th What the heck happened?
In the field of commodity economics there is an area of study aptly called "Impact of News Announcements". In brief, the point of the research is to determine the extent to which "news announcements", e.g., market reports, crop reports, inventory reports, etc., move the market. Well, the cheese market clearly got a boost upward from the USDA's June Cold Storage Report. That report signaled lower than anticipated commercial stocks of cheese on hand and sent the cash and futures market prices seeking new highs. Demand is strong, production off and inventories not as high as anticipated. A recipe for high cheese prices.
Now along comes the July Cold Storage report and guess what? The USDA has revised the June numbers UP a whopping 65.4 million pounds. Add to this a reported increase in July commercial stocks of 15.4 million pounds and we have over 554 million pounds in commercial inventory. This is whopping 20.3% larger than last year. Total July 31 cheese inventory is put at 762.5 million pounds, 28% higher than last year at this time.
What about the effect of "news in announcements"? From August 13th to August 20th, the November and December futures contracts on the Chicago Mercantile Exchange declined over $2.00 per hundredweight. According the Dairy & Food Market Analyst Report, Inc. of August 20th, if you had been tracking the BFP futures contracts carefully you could have locked in the equivalent of $16.69 BFP for the 4th quarter of 1999! To put this in perspective, this is over $4.00 higher than the average BFP for the typically experience in the last quarter of the year.
What about by the time you read this report? You can still lock in some very good fall prices if you know your cost of production and have learned to follow the markets. However, if you wait to see what the highest price will be you will miss the boat. The $16.69 equivalent price vanished after August 12 as the market reacted to the "news" that there is a lot more cheese out there than formerly anticipated. When the market breaks, and you can take it from me it will break, the price will come down faster than water off a tin roof and it will be too late to act.
What does mean for your operation? If you are tapping into the wealth of information on the markets out there - good for you If not, now is the time to make this a priority. As the new Federal Order provisions come into place, the tie between the dollars in your milk check and the behavior in the product markets will only become more pronounced. These are the "new rules" of the game in the dairy business.