Are There Opportunities for Price Protection?
It seems the milk market is similar to a frog in a pan of water on the stove. You can slowly change the temperature of the water and it will not feel it. Everyone was well aware of falling milk futures from mid-May through early July as price declines were nearly a daily occurrence. Since then, Class III futures have been moving higher, but it is not receiving much fanfare due to prices remaining low. As each contract converges to cash, price slips back as extra price premium is eliminated from the market. August is moving in a sideways range with the trade having nearly half of it priced. September is beginning to follow suit as it begins the initial convergence to cash. However, September is still wide open to underlying price movement and has the ability to move quickly. October and later contracts have regained about half of the losses suffered since May.
So the feeling is the same as when futures prices increased earlier this year to $17.00. Most felt that prices were going to go higher and pricing opportunities just were not there. Thus when futures prices were below $15.00 in early July, many expressed the desire to initiate price protection if futures moved back to $16.00. As Class III futures for the fourth quarter have reached and exceeded those levels, there is again little interest in establishing a price floor.
The concern here is that spot cheese and butter prices continues to chop and if they remain in a somewhat sideways pattern, the current $16.00 futures prices may end up to be actual announced Class III prices below $15.00 as July will be and possibly August. Don’t get me wrong here. I do not want to frighten producers into trading, but want to make you aware of the potential of the market and the current pattern. Current fundamentals are not very bullish. Establishing a price floor with options does not lock in a specific price allowing to capture any upside price potential that may develop.
Cow numbers are not declining and remain the same as a year ago. Milk production is higher than last year and cheese inventory in June set a new record for the other cheese category consisting of everything except American and Swiss cheese as well record inventory for total cheese. Bear in mind, this is not a new record for the month of June, but the highest inventory ever. This inventory will need to be reduced in order to allow prices to exhibit some real upside potential.
The $12 billion that is to be used as aid to farmers due to impact of tariffs is certainly welcomed from the standpoint there will be compensation for some lost income, but the amount that will be received may only be a token of what is needed to make up for the losses. It is unclear how this will distributed. Some will be used for purchased through the Commodity Credit Corporation to remove product from the market. The concern is whether this will be new purchases or be part of the purchases the government already does. Having the government involved in this way for this reason is never a good situation.
The bright side is there is evidence export activity seems to be remaining strong. Dairy products may continue to be purchased and tariffs paid in order to get the excellent quality dairy products produced in the U.S. This would provide some support to the market.
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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