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HighGround Dairy Cold Storage Report Analysis – August 23, 2013

Butter and cheese stocks appear heavy in the US as manufacturers’ stocks of cheese and butter continue to set monthly all-time highs. We have to go back to the early 1990s when more butter was tucked away – much of it by the federal government. But this is nothing new, folks. We have been setting these records more often because of a variety of factors. Stocks have expanded over the years to maintain appropriate inventories against demand growth and with money so cheap to borrow, it has been easier than ever for manufacturers to hold on to their product. Comparing the raw figures against a 5 or 10 year average would be a moot point. More important to us are the directional trends of these inventory levels. What appeared to be a bearish stocks report in June has turned a bit bullish as monthly drawdowns were better than expected in July. USDA also made a relevant 5.2 million downward revision to June stocks which made the monthly declines all the more substantial at 23.1 million pounds (-7.2%). In fact, this was the largest June to July drawdown on a percentage basis since 1998. But take our slightly bullish take on this report in perspective – the US still has nearly 300 million pounds of butter sitting in freezers around the country. It is going to take a demand miracle to bring those numbers down to more “normal” levels by the end of the year. But if we got this kind of start in July with butter prices declining from the low $1.50s to the mid $1.40s throughout the month, imagine what might happen with prices at their lowest levels in nearly 15 months in August. A seasonal bump in prices is anticipated over the next 30 days but getting past $1.60 for an extended period of time may prove to be a challenge given current fundamentals.

With year-over-year milk production strong in the Upper Midwest in July, cheese production has likely remained above previous year levels last month. Stocks remain elevated as a result of that productivity and perhaps a bit of resistance to prices near $1.80 in late-July. Revisions issued by USDA cite more natural American-style cheese and less “other” cheese (mostly Mozzarella) produced in June, but this does little to upset the trends in this category. We view this report as neutral to the current CME spot and futures markets.

While we have been surprised at the CME spot cheese weakness over the past week, we do not believe the Cold Storage report provides any answers. A mild August and perhaps a bit of weakness in cheddar demand over the past few weeks has pushed product to the exchange. But as prices roll back heading into the strongest demand months of the year and the gap between the international cheese market widens, we believe the weakness in the $1.60s is short lived and a seasonal move higher will occur in September.

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