Are Higher Milk Prices on the Horizon?
Milk futures have settled into a sideways trading pattern. Futures are trying to remain in line with the underlying spot prices slowly eliminating any price premium that had been prevalent. Overall cheese prices have been slowly trending higher, but not without volatility. Even as they have trended higher, futures have not responded in the same manner. Traders are in a quandary as to long-term market direction. There as some indications that milk prices could have established a bottom and prices may trend higher though the rest of the year. Much of this seems to stem from some analyst’s predictions that are based on underlying spot prices slowly increasing, dairy farms going out of business, technical analysis, and cycles.
Dairy farms are going out of business, but we have yet to see a decrease in milk production or cow numbers. This may be evident over time if milk prices continue to remain low. However, predictions of better milk prices as the year progresses may limit culling or exiting of the business as farmers will want to keep barns full in order to take advantage of strengthening prices.
The February Milk Production report indicated milk production continues to remain strong with cow numbers still increasing. This, in and of itself, is not necessarily bearish if demand will absorb the increase. However, the February Cold Storage report continued to cast a shadow over the market. Inventory continue to exceed the previous year indicating demand is not keeping up with production. One has to wonder how long this can continue without significant impact on the market. American cheese inventory is currently 2 percent above a year ago and the highest inventory for the month of February since 1985. Swiss cheese inventory is 3 percent above last year. Other cheese inventory is 15 percent above last year. Total cheese inventory is the most concerning as stocks are up 7 percent from a year ago and are also at a record high for the month of February. Monthly record high inventories continue to be established and have been for nearly three years. This is a growing concern and a caution to those who are bullish on dairy prices as the year progresses.
The market always has a way of taking care of itself by changing supply and demand resulting in lower prices curing lower prices and higher prices curing higher prices. The periods of lower prices are always the most difficult if one takes the course of just taking what the market provides without being proactive with marketing. I have stressed many times over the years that hedging milk and feed prices is just as important as any other area of the dairy operation. You can have excellent milk quality, high production, great herd health, efficient facilities, and the best cow comfort, but still lose money due to low milk prices and maybe even higher feed prices that reduces your income over feed. Management provides the means for higher milk production while market provides the protection of income.
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.
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