October market report


The beginning of October is a key part of the calendar in the dairy industry as buyers start placing holiday orders and markets begin to move the way we always expect them to ahead of a more festive time of year.

But markets leading into this month have been largely flat. Aside from local heatwaves, a mild summer kept milk supplies longer than normal deeper into the season. Even butter, which enjoyed a rally early this year that had the industry considering a serious upward breakout, has since lost its momentum.

It has us asking: Will a somewhat strange end to the summer lead to any surprises in markets toward the tail end of this year? And how is 2018 shaping up?

Cheese markets make some gains

Perhaps the only surprise we’ve seen in recent weeks is strengthening demand for block cheddar. And while an autumn heatwave that hit at the end of September put some sudden pressure on milk availability in the Midwest, drawdowns on cheddar inventories continue and immediate needs are being met.

Meanwhile, history tells us demand for processed cheese always flags in the fall while demand for natural cheese strengthens. We expect that will remain the case this year.

We’ve also noticed no real aggressive hedging in cheddar markets for the early part of next year. We expect movements made in next month or so to teach us more about how cheese markets shape up for 2018. But for the moment, it appears no one is worried about having enough cheese.

Butter markets remain flat

As stated above, butter markets have since cooled off compared to the midsummer murmurs that its rally could break through $3.00 and go higher yet.

Instead, the factors fueling that speculation never panned out, namely:

  • Even though an overseas butter shortage sent international prices skyward, domestic churns have resisted converting their works to produce 82% butterfat for export. Those high prices were not high enough to overcome the costs of conversion, freight and customs duties.
  • Likewise, international buyers have so far resisted paying the premium to import 80% butterfat from the U.S. Instead, they’re either finding a different source of fat for butter production or just going without.
  • Because butterfat stores haven’t been put under pressure due to the shortage overseas, domestic markets remain well-supplied; accordingly, prices haven’t moved much.

What we’re watching

With domestic butter inventories in great shape, we’re confident holiday demand will be met without issue in North America. What interests us more is whether international butter supply woes deepen enough to change the calculus for domestic churns in the early part of 2018.

We’re also watching the nonfat market closely. Right now, it’s trading in a comfortable range of between $0.80 and $0.90. But we wonder if that market may soon trend lower if milk production in Europe and Oceana is strong. Fueling our concern, we note that the Global Dairy Trade’s Oct. 3 event was its most bearish in recent months.

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