Dairy Excel: Do cheese market retreats spell the end for good prices? Expert opinion


OK, it has finally gone and happened.

After an impressive run that began back on July 31 of this year, the cash cheese market on the Chicago Mercantile Exchange (CME) has finally gone and taken the plunge!

As I write this article, the block cheese price has retreated 17 cents per pound and the barrel cheese price 30 cents per pound.

Of course we all “knew” that unless the whacky workings of the cheese market had gone completely out of kilter, it just could not last.

Good thing that it did last long enough to set milk prices for August, September and October, and advanced prices for November!

This shot in the arm moved the Class III price steadily up from $9.75 back in June to a welcomed $14.39 for October.

The Uniform Price in the Mideast Federal Order moved up from $10.63 in June to $13.93 for September and should be even higher when announced next week.

Need to know. Now with cheese prices making a typical seasonal retreat back to what will likely be the $1.25-$1.30 level, and the butter price trading in the $1.14- to $1.19-per-pound range, it may appear to you that all the good times and market pricing opportunities are over for the foreseeable future (the next six months anyway).

The good news is that this is just not the case.

If you are a proactive pricer, that is, one who proactively takes action to secure your price when the opportunity appears, rather than waiting to see what the market will give you, then this column is just for you.

By watching the Chicago Mercantile Exchange Class III futures prices and knowing what to expect as “average cash prices,” there may be premiums or discounts to what we might expect to receive in the cash market.

In detail. Let me elaborate.

In the table, I show the average announced Class III price, by month, for differing number of years used to compute the average.

From these averages, I have computed the premium or discount that exists in the current CME futures Class III prices.

The premium is computed as the CME futures Class III price (as of Nov. 5) minus the average Class III price using the following averages: three-year, five-year, seven-year, 10-year, and 14-year periods.

Looking ahead. Here’s a look ahead for 2004 pricing.

Let’s take January as an example.

If you think this coming January will be very much like the average of the last three, 2001-2003, you can see from the entry in the table coinciding with the three-year average, that the current futures price is $1 more than the three-year average Class III price for January.

If you wish to include more January cash Class III prices, then look at the five-year average in the next row down.

The premium is now a minus 4 cents. No premium at all, but a discount.

As you work down the column and take in even more January prices, you can see that the discount grows.

Now you have to make a decision. Are the current conditions, supply vs. demand, more likely to be represented by the last three years, five years, or 14 years?

If you are thinking surely the January price cannot be less than $11.55, recall that in 2001, the Class III price slid from $15.90 to $11.87 by January of 2003!

Now look at the numbers in the table for the February through April months.

Regardless of the number of months you wish to include in the average cash Class III price, the current futures market price is offering a decent premium.

For example, February and March contain in excess of a dollar premium relative to the three- and five-year averages.

More consideration. The April premium also deserves consideration.

As we get to the summer and early fall months of July through October, we can see that the current CME futures prices are all discounts to what we have received, on average, during these months.

This is exactly what you should expect.

Futures prices for commodities that are not storable, such as milk, reflect the futures market participants’ forecasts of what they expect the market price to be in the … what else? … future.

And as the weather (and its impact on production) is the big uncertainty during the summer and early fall months (witness 2003), these same market participants are conservative in forecasting bad weather.

More information. If you have access to a computer with an Internet connection, you can find this premium/discount table displayed at my Web site: http://aede.osu.edu/programs/ohiodairy..

The table of premiums and discounts is updated after close of trading each day.

If you would like to become more knowledgeable about the milk and dairy markets, and would like to become a “proactive pricer” I will be offering my course, Pricing Milk and Dairy Products in the United States, through The Ohio State University at ATI in Wooster, Ohio, Jan. 8-March 13.

This is a comprehensive course designed to broaden your knowledge of milk and dairy product pricing, Federal Milk Marketing order pricing rules, and the factors that determine your milk check.

The course provides practical hands-on experience with the dairy futures and options markets and pricing.

The course meets each Thursday from noon to 3 p.m.

If you would like more information on this course contact Jan Elliott at 330-287-7511 or e-mail elliot.3@osu.edu.

The course will not be offered again until 2006 so do not miss this opportunity!

(The author is a dairy marketing and policy state specialist with Ohio State University Extension. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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