Nov. 29 2012 09:27 AM

On a pound-for-pound basis, we are more than $1 over the world market.

by Amanda Smith, Hoard's Dairyman Associate Editor

When push comes to shove, U.S. consumers are more willing to give up milk as prices rise than any other beverage on the market, noted Mike North a senior hedge consultant with First Capitol Ag, at the ABA National Agricultural Bankers Conference. And once they remove it from their diets, chances are slim that they will resume consumption when prices lower.

A key watch point for dairy is the length and strength of the holiday purchasing period. It typically won't last an extended period of time and is coming toward an end now. As this happens, markets often move lower. Cheese stocks have tightened since last year, but there are still plenty available though, as this purchasing season comes to a close.

Product drives milk price and monthly block Cheddar is near a record high. To get a high milk price, we need a high cheese price. In 2008, with a robust economy, block Cheddar prices ran around $2.20. North questions whether or not we can do it now. He believes it is questionable. When he gave his talk in early November, we sat near $2.11.

Cheddar around the world is close to $1, which breaks down to $0.80 plus freight. U.S. exports in this category have been quiet the last three to four months. "What happens if it backs into our inventory 2, 3 or even 4 percent?" questioned North. On a pound-for-pound basis, we are more than $1 over the market.

Generally, highs and lows are in a similar price range. "We have some vulnerability," said North. To see high prices, we have to work it out; we have to work through product inventory. Currently, world prices are lower than ours. The world market is only at $1.60 for blocks; they don't want to buy beyond that point. We are able to separate ourselves out because we are moving into the biggest buying season, but do we have enough domestic support to outpace the world?

If a realization of product shortfalls worldwide occurs, there may be a willingness of world product buyers to "pay up." Regardless, these values likely will not go to $2. More likely, we will meet them in the middle at $1.60. The inherent problem with this is that $16 milk cannot pay the bills. North asked, "Can we afford to give up $3 of the market?"

Last Thursday, we published a blog related to the first half of Mike North's presentation on corn and milk prices at the ABA Conference. You can read that material here. (