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Trading  | June 29, 2018

The Washington Post reports American warehouses have amassed their most massive stockpile of cheese in more than 100 years since government regulators began tracking dairy products, the result of oversupplied domestic markets and waning consumer demand.

Commercial and government cheese storage facilities now have a whopping 1.39 billion-pound surplus, counted by the Agriculture Department in May and published in a report on June 22. It is a 6 percent y/y and a 16 percent jump since the government launched ‘quantitative cheesing’ to buy excess supply in 2016.

Cheese analysts say record stockpiling is attributed to a decline in consumer demand for milk. When dairy cattle produce too much milk, processors generally convert the milk into cheese, butter, or powder, which is the easiest method for long-term storage.

Record amounts of cheese, however, comes with a significant drawback: If it is being stored, it is not sold, that leads to margin compression of farmers who make their living from the dairy industry.


The Post notes that Trump’s trade war has prompted fears that stockpiles will build further if trade tensions with China and Mexico slice into cheese exports.

“Milk production continues to trend up, and that milk has to find a home,” said Lucas Fuess, director of market intelligence at HighGround Dairy, a consulting firm.

“The issue this year is that, with so much supply, it’s going to be tough for a lot of farmers to be profitable.”

Regarding seasonality, cheese surpluses tend to occur in the summer months. Dairy cattle are at their most productive stage in spring when the days are longer, and the feed is of much higher quality. Better genetics of the cows have also produced more milk. Simultaneously, demand for cheese declines among Americans in the summer months and usually picks back up during the school year.

“I anticipate that we’ll continue to set these records,” said John Newton, director of market intelligence at the American Farm Bureau Federation.

“We’re producing more milk. It’s inevitable. That milk needs to get turned into something storable.”

“But the sheer amount of cheese in storage may be causing problems. Cheese prices have fallen in recent weeks,” Fuess said. Since 2014, cash-settled cheese futures have declined by more than -30 percent. Judging by the descending channel, if the upper rail of the structure is rejected, well, the next liquidity gap in the auction could form.

“That fall is problematic,” said Mark Stephenson, director of dairy policy analysis at the University of Wisconsin at Madison, “because the price of cheese is a major factor in the equation that USDA uses to set the price that dairy farmers receive for their milk.”

When Stephenson chatted with The Post, the current price was $15.36 per 100 pounds. From 2017 highs, price prints -7 percent discount and well below the break-even for many farmers. “When inventories get too large, that pushes the prices down,” he said. “And yes, that trickles down to dairy farmers.”

Michael Dykes, president of the International Dairy Foods Association, told The Post, he is sure Americans will eat through the stockpiles. That is because of stock-to-use ratios, a measure of the amount of cheese taken out of storage, have remained elevated when inventories are high, and prices are depressed.

Dykes warned The Post that mounting trade tensions could grow inventories to crisis levels. Last year, the United States produced 12 billion pounds of cheese and exported more than 341,000 metric tons to countries such as Mexico and China. The fear is if those countries turn to Europe or other countries besides the United States, the stockpile could reach crisis levels. Already, the Department of Agriculture has been prepping cheesemakers for the worst case scenario of much higher inventories.

“One milking day a week goes to the export market,” Dykes said. “There’s a lot of uncertainty now. I don’t think we really know what will happen yet.”

So, when does the next round of ‘quantitative cheesing’ come?

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