Dick Groves
Editor, Cheese Reporter

 

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The Hazards Of Making Dairy Price Predictions

Back in our July 11th issue, we wrote about all the dairy price records that were set in the first half of the year, under a headline that read: “A First Half For The Record Books.”

Most of our comments were factual and accurate, including the records set by the 40-pound Cheddar block price at the CME back in January and March, and by federal order Class III prices in February and April.

Among other things, we pointed out that, when the block price reached a then-record $2.2950 per pound on January 23, it broke the “old” block price record of $2.2850 per pound, set back in May of 2008. The point was, sometimes it takes several years for dairy price records to be broken.

But just detailing the recent history of block price records (going back to 2004) wasn’t enough. We had to speculate about what the block price would do, or more correctly wouldn’t do, for the remainder of 2014, and that’s when things got kind of dicey.

Here’s what we observed back on July 11: “Given that the block price ended the first half of 2014 at $2.0000 per pound, who knows what the rest of this year has in store for cheese prices? But recent history suggests that the record $2.4325 per pound price reached earlier this year won’t be broken anytime soon.”

That made sense at the time, given that the previous block price record of $2.2850 had been set back in 2008. It also made some sense given that, after ending the first half of the year at $2.00 even, the block price fell below that level for the first two weeks of the second half of the year.

But as it turned out, “anytime soon” ended up being last Friday, September 18, when blocks settled at $2.4500 a pound. So the record block price set back on March 24-25 ended up surviving for just under half a year.

After some comments about milk prices (mainly Class III prices) and the Consumer Price Index for dairy and related products, we concluded that July 11th column as follows: “Based on what’s happened with prices, the US dairy industry will be talking about 2014 for years to come. And based on recent trends, they’ll mostly be talking about what happened during the first half of the year, except for retail dairy prices, which may keep rising.”

Again, much of that paragraph is pretty accurate. The dairy industry will, undoubtedly, be talking about 2014 for years to come. And retail dairy prices, as measured by the Consumer Price Index, fell slightly in June but then increased again in July and then set a new record in August.

But it looks right now, as the third quarter of 2014 comes to an end, that these future conversations will be about what happened throughout the year, not just the first half of the year. And if there’s a more specific focus, it will probably be about the third quarter of 2014, and especially about September.

Of course, nowhere is that more obvious than when looking at what’s taken place with the CME butter price.
Back in that first full week in July (July 7-11), the CME butter price actually declined twice while increasing just once, and the weekly average of $2.3845 per pound was actually down about half a cent from the previous week.

And as we pointed out a few weeks ago (after the butter price first established a new record high), the butter price record of $2.81 per pound had stood for almost 16 years, since September of 1998. And back when that 1998 record was set, the record price shattered the previous record by almost 47 cents per pound.

Based on the small movements, both up and down, that were occurring on the butter market back in July, as well as what was happening on the Global Dairy Trade semi-monthly auction (the average winning price at the second GDT auction held in June was about $1.68 per pound), it didn’t seem likely that the CME butter price would break that 1998 record, let alone become the first US dairy commodity ever to break the $3.00 per pound barrier.

But that’s just what the butter price did, reaching that $3.00 per pound level two weeks ago and then continuing to climb, and set records, last week, when it settled at $3.0600 per pound on Friday.

But butter hasn’t been the only dairy commodity setting records here in September. As noted earlier, the block market, which set a record back in March that we didn’t expect to be broken anytime soon, set another new record last Friday when it settled at $2.4500 per pound.

While that’s impressive, it pales in comparison to the records being set this month by 500-pound barrels. Historically, there’s usually about a three-cent spread between the block and barrel price, and that applies to price records as well.

For example, when blocks reached a then-record high of $2.4325 per pound back in March, barrels also reached a new record high of $2.3775 per pound, or 5.5 cents per pound under the block record at that time. Last Friday, when blocks reached a new record high of $2.45 a pound, barrels also set a new record, at $2.43 a pound.

But this week, while the block price declined, the barrel price actually jumped another six cents, to a record $2.49 a pound.

So it’s possible, just given recent trends, that the all-time barrel price will be higher than the all-time block price, at least for a little while.

How long will that last? We’ll opt not to make any predictions, but point out that, over the past decade, cheese price records have lasted for anywhere from less than two months to almost six years.

Beyond that, the only observations we’ll make about future prices is that they’ll be volatile, and that records are made to be broken. DG


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