unkown markets
August 29, 2016

Have Dairy Prices Peaked for the Year?

 |  By: Robin Schmahl

The market seems to be turning its attention to the other fundamentals that have been prevalent for some time, but have been hovering in the background as tight fresh cheese supplies have been in the forefront. Growing inventory, increasing milk production, and higher cow numbers have been the trend for quite some time. However, spot prices have been increasing due to strong buyer interest for cheese. Fresh cheese has been in demand with most of it already committed before it was manufactured. Aggressive buyer interest on the spot market gave those holding cheese supply greater confidence to hold tight to what they had. Orders needed to be filled with buyers having to bid up to obtain the required volume of cheese to fill the orders.

Strong demand for fresh cheese provided a significant increase of cheese prices which resulted in a substantial increase of milk prices from the low set in May. Milk prices based on cheese prices will have increased nearly $4.15 per cwt from May once the Federal Order prices are announced on August 31. But that may be the high for the year.

The underlying issue is that during the three months of price increases; cow numbers, milk production, and inventory levels continued to increase. Total cheese stocks showed new record highs each of those three months with the potential to see another record for the month of August. Lower milk prices earlier in the year did not slow production of milk or dairy products. Farmers did not reduce herd size as an option to reduce feed costs or to generate another source of income. There was no need to. Cheese prices began increasing resulting in higher futures prices indicating much better milk prices to come. However, that may be coming to an end. Indications are that the highs of spot prices may now have been established. Time of year would suggest price may have reached its peak seasonally. Buyers may now have sufficient inventory on hand and supply contracted to cover expected demand for the rest of the year. This would reduce the need to aggressively purchase product on the spot market.

Increasing milk production and growing supply may now move to the forefront as a focus for market participants. Slow exports of cheese and butter may now be of greater concern as supply backs up in the market place. Domestic demand is increasing, but will it be sufficient to absorb enough product to support prices? We may be moving into the perfect storm with an increasing dairy herd, strong milk production, slow exports, and growing inventory coming together requiring lower prices in order to stimulate greater buyer interest.

Prices on the Global Dairy Trade auction platform are strengthening providing a greater anticipation of higher prices to come. This would certainly be good news for dairy farmers in other countries and good news for the U.S. However, this will not support domestic prices immediately. This remains a wide chasm between U.S. and world prices that will need to be closed. Once U.S. prices are competitive, it will then take time to see exports improve as already contracted supply runs out and new contracts are established. This could take anywhere up to six month or longer. Back in 2014, we enjoyed strong exports for a period of time after world prices fell and U.S. prices moved to record highs due to already existing contracts being filled. The reverse may also be true.

I am not suggesting milk prices will fall back to the level seen in May or back to 2009 levels, but prices may be moving in a seasonal downtrend a little earlier this year as fundamentals that have been prevalent and in the background may now come forward and take center stage.

My recommendations are the same as my previous article on May 16 which is to establish put spreads for the first half of next year. This will provide some risk protection to the downside while leaving the upside completely open to take a higher price is one develops. You certainly do not want to see milk prices following the same pattern as grain prices without anything in place to manage risk. You cannot afford it.

 

Upcoming reports:

  • August Federal Order class price on August 31
  • July Agricultural Prices report on August 31
  • July Dairy Products report on September 1

 

 

 

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

 

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions

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