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August 15, 2018

Caution: Extreme Milk Price Volatility Ahead

 |  By: Anna-Lisa Laca

While dairy markets are no stranger to volatility, the trade tensions could increase the magnitude of volatility milk markets are currently seeing. While there’s great potential for markets to move higher, there’s an equal amount of potential for them to move lower. 

“If you believe the futures market, it's telling you that it's going to be $16 +,” Mike North says. “I think there's going to be a little bit of a rougher road to get to December than what the market is projecting right now, because we haven't wrapped up this trade discussion yet.”

While North says discussions with Chinese and the possibility to wrap up a deal with Mexico in the near future could push milk prices higher, the reality that trade tensions don’t get resolved could sink them just as quickly. 

“Here's the fallout: if we don't get the deals done. If things go south with Mexico, if China digs their heels in further, if we can see continued cow number growth and production growth, without any pushback from summer heat, the reality is we could take [milk prices] lower,” he says. 

North uses July as a case study where milk fell all the way to $14 on the Chinese tariff news. While he doesn’t expect prices to be back in the $14 range, he says a retraction to a milk price in the $15 range is plausible. 

“So, it's going to be a little bit of a rough road,” he says. “And that plays into the 2019 discussion too. Right now, we have a $16.10 cent average for the whole year, we're about 15.85 for the first half of the year. Those prices, considering that we're in a really troubled trade discussion right now, are actually fairly elevated relative to what our reality has been in recent years.”

Because of that, North looks at 2019 futures prices as an opportunity, realizing markets could go higher if trade deals get finished. 

“Look for a lot of volatility,” he warns. “That would be my bottom line statement about milk prices. Not just to the end of the year but going out into next year. Look for a lot of volatility because the market is very unsettled right now.”

According to North it’s going to take some time to understand how the tariffs have impacted markets, where product is backing up, how it’s backing up and in which categories. As that information is discovered, price volatility is imminent. 

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