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Markets Finally Have a Little Spring in Their Step

After dragging their feet for months, the Class III markets finally have a little spring in their step. Firm demand, slowing global milk output, and tightening stocks suggest that the worst of the dairy downturn is finally in the rear-view mirror. Near-term milk prices are far from exciting, but they are much better than where they were.

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After a long winter, the cheese-market bulls were finally allowed to leave the barn, stretch their legs, and feast on tender green shoots. They were particularly frisky in the CME spot Cheddar barrel market, where prices surged to six-month highs. In addition, markets had two perplexing reports to digest last week.

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The spot dairy markets took a step back this week, but – for the most part – they remain noticeably higher than where they began the year. The cheese market was hardest hit. CME spot Cheddar blocks fell 7.5ȼ to $1.535 per pound. Barrels slipped 4.5ȼ to $1.365. As the spring flush boosts fresh cheese supplies, the bulls have given back some of last month’s significant gains.

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The dairy markets spun their wheels this week. Traders seem a bit lost as they seek to navigate the shifting landscape. In the distance, highlighted by the third consecutive decline in USDA’s annual dairy heifer estimates, is the promise of a smaller milk cow herd, and perhaps lower milk output. Closer to the fore, the spring flush looms large.

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Early this year, we highlighted the combination of too much milk on the market and mysteriously low demand. Now, demand is stronger. So why haven't prices improved?

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Now that an updated trilateral free trade agreement among the U.S., Mexico and Canada is tentatively in place, dairy industry players are combing through the details to get a sense of what will happen once the terms of the deal become effective in 2020.

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News that American and Mexican trade authorities reached a tentative agreement on an updated NAFTA was welcomed by the dairy industry with open arms. But it's far from a sure thing: If Canada doesn't also buy into the deal, a new NAFTA will be sunk.

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It’s strange how much can change over the course of a year and yet we end up almost where we started. Here we are again at the end of summer, back to talking about a butterfat shortage in Europe.

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It become obvious this spring and summer that the dairy industry was climbing out of the bearish period that marked late 2017 and early 2018, even in the face of tariffs and trade uncertainty. But as we dig a bit deeper, we've noticed a different trend, one which bodes far worse over the long term than tariffs.

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When Mexico announced its retaliation to U.S. tariffs on steel and aluminum imports in early June, those affected by new tariffs predictably flipped out. It included the dairy industry, as cheese was among products newly subject to levies. But is the industry’s frantic reaction warranted?

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Recent moves and counter moves in international trade have everyone nervous about how new tariffs announced by the Chinese and American governments will affect their ability to do profitable business in a global economy. Dairy is no exception. But an examination of what key players are actually doing will show that threatening rhetoric may not reflect reality.

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