What's the Beef With Dairy Prices?

Rising dairy prices are the flip side of cheap burgers -- good for arbitrage as well as barbecues.

What the burger giveth, the cheese taketh away.

Americans enjoyed some of the lowest ground-beef prices for their Labor Day barbecues in five years last week, thanks to a glut of cattle, chickens and hogs. Unfortunately for those who like something to melt over their patties, prices for the milk used by cheesemakers rose to a 20-month high last month, with Chicago Class III milk futures up 21 percent in the three months to last Monday.

Got Milk?

Dairy prices are rising just as beef prices are falling

Source: U.S. Department of Agriculture, Bloomberg

Note: Rebased. Sept. 30, 2013=100.

The twin shifts aren't unrelated. Dairy prices worldwide have been struggling for years from the same dynamic that's affected producers of heavier commodities such as crude oil and copper. Farmers who rode a wave of growing Chinese milk consumption have been stranded after demand failed to meet the market's lofty expectations, leaving the world awash in more milk than it could swallow.

Dairy cows don't just provide milk, though. Much as container lines with too many ships can make the best of a bad job by selling them for scrap, farmers with too many cows will often end up turning the lower-yield animals into beef. That's increasingly been happening in recent months -- over the 13 weeks through Aug. 26, 7.6 million cattle were slaughtered in federally inspected abattoirs, more than in any rolling quarter since 2014 1 .

The Jungle

More cattle have been slaughtered in federal U.S. abattoirs than in any 13-week period since 2014

Source: U.S. Department of Agriculture, Bloomberg

That's helping tighten the supply of milking cattle and bring prices back into balance -- and it's a picture that's mirrored across the world. 

In New Zealand, the biggest dairy exporter, the average winning price for auctions of whole milk powder rose 3.6 percent to $2,793 a metric ton last Tuesday, the highest level for the global benchmark since early 2015. That's just 7 percent short of the $3,000/ton level at which local farmers start to break even.

Milking It

Prices at New Zealand's whole milk powder auctions are heading back to break-even territory

Source: Bloomberg

In Asia, three of the five best-performing foodmaking stocks during August were in the business, Bloomberg Intelligence analyst Thomas Jastrzab wrote earlier this month. Vietnam Dairy rose 18 percent, China Mengniu Dairy was up 14 percent, and Want Want -- which gets more than half its revenue from dairy and beverages -- gained 7.6 percent.

There's help at hand on the other end of the supply chain, too. The U.S. Department of Agriculture last month announced plans to buy 11 million pounds of cheese, valued at $20 million, to give to food banks and reduce a cheese surplus that's at its highest in 30 years.

All of this is a further sign that the woes afflicting the global dairy industry could be coming to an end. That's good news if you're in the business of producing milk -- but pity the poor beef farmers.

All those animals heading to slaughter are pushing their revenues through the floor. As U.S. traders returned from munching down on their Labor Day burgers last Tuesday, live cattle futures in Chicago dipped below $1 a pound for the first time since 2010.

(Adds USDA's plan for cheese purchase in eighth paragraph.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Only meat from federally inspected slaughterhouses can be traded across state lines, so the federal slaughter is more closely linked to broad market prices.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

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