Exports Are Very Important to the Dairy Industry
Many times it takes some time to turn the momentum around in the dairy industry. Reaction can be slow depending on various market fundamentals. Low milk prices may take time to cure as cows are culled, milk production declines, or demand increases. The same is true for high prices as milk production eventually increases, cow numbers increase, and demand slows. That is why we have cycles in markets. This is not only true for the dairy industry, but also for many other markets. However, there are sometimes when the market can change abruptly due to other factors which can have substantial impact on the market.
A prime example is what recently took place as Canada implemented a new policy providing incentives for processors to provide domestic supplies rather than reaching out to the U.S. for supplies. This is apparently a violation of trade commitments between the U.S. and Canada according to NAFTA. Two U.S. companies have been hit hard as their Canadian customers ceased purchasing ultrafiltered milk which is an ingredient used to increase protein content in cheese and yogurt. Many of us have likely not even heard of ultrafiltered milk and may not have known that protein was being added to boost protein in some milk and yogurt varieties, but we all know about it now. It has risen to one of the top new stories of the dairy industry as it has had a substantial impact on two companies in particular. Grassland Dairy Products Inc. in Greenwood, Wisconsin and Cayuga Milk Ingredients in Auburn, New York have lost a substantial amount of business. Grassland is reducing milk intakes on May 1st by one million pounds per day while Cayuga lost 30% of their overall business. This is devastating as these companies had to notify some of their patrons that they would not be taking their milk after the end of April. This certainly is devastating enough, but this devastation is compounded by the difficulty of finding another milk plant that can take them on as a patron. Many other plants are running at capacity and cannot take any more milk leaving dairy farmers scrambling to find a home for their milk and maintain their businesses and livelihood.
The time of year compounds the problem as our country is moving through spring flush. Many milk plants are running at capacity with increasing milk receipts expected over the next two months. If this would have taken place at the end of summer, it might not have been as difficult as it currently is.
This reinforces the necessity of the world market and the importance of exports of dairy products to other countries. We are not an island unto ourselves and international business in the dairy industry is a necessity. This brings us to the point of maintaining competitiveness in the world market. By remaining competitive, we may also be looking at prices that may remain closer to world prices or lower in order to stimulate greater international interest. That is why the Global Dairy Trade auction has risen to greater prominence as far as an important even being watched with substantial interest on a bi-weekly basis. Cooperative Working Together has done much to aid in the export of dairy products over the years, but more needs to be done. We have high quality dairy products available to the market, but we need to be competitive and increase market share.
It is unclear how much impact this has had on dairy futures, but there are other fundamentals that may make it difficult for milk prices to rise anytime soon. Current milk prices are not low enough to trigger increased culling. The average Class III price for the first three months of this year is running $2.09 above the same period of time last year while Class IV price is $2.19 higher. So, we are on track to see an increase of milk price near $2.00 as predicted, but will that be maintained?
The recent change in market psychology increases the need to utilize options or option spreads to protect milk prices through the third quarter of the year. A floor needs to be established to protect income. We certainly do not want to gamble with our whole dairy operation by taking the position of hope. The hope that milk prices will increase and everything will be O.K. rather than purchasing put options or option spreads to establish a minimum price for you milk and livelihood.