You'd only need one look at recent history on the CME to see the rollercoaster that has been spot cheddar prices.

In this episode, T3 notes the collision of around a half-dozen contributing factors to explain why it's happening. Ted discusses why the Federal Order system is hurting the situation more than it's helping.

Anna: Welcome to "The Milk Check," a podcast from T.C. Jacoby & Company, where we share market insights and analysis with dairy farmers in mind.

Ted: What should we talk about? Markets have gone from the penthouse to the outhouse.

T3: Well, I would say the markets went from a fair price to the outhouse to the penthouse back to the outhouse, and I actually think we're gonna probably end up back in the penthouse in about a month. It's a roller coaster.

Ted: And it's chaos on the milk side. I visited with our milk group today a little bit and depending on what you're making and what you're selling and what your orders are, you've got the Class III for August right now at $19-something, and I think probably around $19.50 or so. And you've got the Class III for September probably around $17 maybe?

T3: Yeah $16.80 or so right now, $17.

Ted: Something like that. So they could have as much as a $3 per hundredweight gap. So here we are trying to sell milk for delivery at this point in time and people are trying to figure out what price they're gonna wind up having to absorb to put the milk into cheese and then what they're gonna be able to sell the cheese for. So the futures market, at least in my view, is rather inadequate to solve that particular problem. And I think that accounts for a lot of the issues right now because, Teddy, and you correct me, you're in cheese, but the inventories are not burdensome and the sales haven't been that bad. In some cases, depending on the style and so on, they've been pretty darn good. And yet the milk, we wind up with some people unwilling to pay the going rate for milk because of the violence in the market at this point in time.

T3: Exactly. And I think the biggest problem that we have right now in the marketplace isn't necessarily the price as much as it is the volatility of the price. Why don't I start by explaining, kind of, what's causing this volatility? What has the journey been since, let's say, the end of March and what it's doing farther down the food distribution channel and how people at the supermarket level and at the restaurant level are reacting to it, and then we can talk about how that feeds all the way back to the milk price and what's causing this rollercoaster that is creating stress for everybody in the pipeline?

When the pandemic started and restaurants started closing and food distributors started canceling cheese orders, the price started to drop. And by the end of March, the price had almost gone all the way down to $1 a pound. But two things happened while we were that low. The first thing that happened was supermarkets started seeing huge increases in sales. And the first part to keep your head around is cheddar, which is how we price all of our cheese and ultimately our milk, is really a market that's skewed to retail. We sell more cheddar marginally in retail and more mozzarella, for example, in food service. And all you have to do is think about it when you're in a supermarket and you look at all the shredded cheeses on all the pegs in the dairy case, you'll see a lot more cheddar packages than you will mozzarella packages. Whereas if you're thinking about it from a foodservice perspective and you think about all the pizzas and lasagna and Italian food and everything you eat, they actually sell a lot more mozzarella in that direction.