Difficult to Predict an Unpredictable Year
It was expected the market would show some unusual price movement once the coronavirus pandemic hit and supply and demand was disrupted. However, no one would have anticipated just how unusual it would be and how much volatility would be experienced. Not only was there a lot of unusual price movement in underlying cash prices and futures prices, but there was unusual movement in the Federal Order pricing system which resulted in large negative Producer Price Differentials (PPD’s).
It has been a very unpredictable year, the effects of which will be felt for a period of time. It was anticipated the large negative PPD’s would decline as the year progressed and get back to a “usual” by the end of the year. However, the current market does not indicate this will take place. September Class III futures fell back $3.34 from August moving the Class III and IV prices close together with a spread of $3.68 and well on its way to converge. However, current futures prices for October indicate a potential spread moving out to near $6.50 which will result in a larger negative PPD again. This certainly has made it difficult and frustrating in the area of protecting milk prices.
It is unclear as to how long the world will be dealing with the coronavirus and its impact on supply and demand in all areas of the economy. To some extent, supply and demand has been able to adjust in order to compensate for these changes, but certain aspects will continue to plague the market for some time to come. Then there is the fear and already signs that the coronavirus may surge again during the winter months. This will continue to impact the food service industry. Earlier estimates were that the food service industry might be impacted through the first half of 2021, but that is now being pushed back to likely most of 2021. The latest statistics I have seen is that it is estimated 100,000 restaurants have closed their doors for good. Most of these were family or fine dining restaurants. Fast food chain stores indicate strong growth as they had been better positioned to compensate for the changes brought about by the virus.
One bright spot that has been seen and is touted is the growth of dairy exports. This certainly has shown some substantial demand increases in certain areas with nonfat dry milk/skim milk powders to Southeast Asia showing the greatest growth. However, we must not become too complacent that this will continue for all categories. There is the potential for cheese exports to slow over the coming reports as the impact of record high cheese prices likely substantially reduced international interest. Butter, dry whey nonfat dry milk/skim milk power prices did not follow cheese prices as they remain sideways and in line with world prices. So, we can expect these categories to continue to show strong export demand while cheese may be a different story.
What is being seen is that farmers are doing what they always do and that is to push milk production. Milk per cow continues to remain above previous years with cow numbers higher. Even though milk prices have been volatile and the full extent of prices resulting from strong underlying cash prices has not been able to be captured, the money received from various government assistance programs has allowed many to improve facilities improving cow comfort, upgrade equipment, and keeping barns full of cows. This is expected to push milk production in 2021 nearly 3.5 billion pounds above this year according to USDA estimated. The hope is that demand will grow in order to use the increased milk output. If not, it may be a difficult year and one that will need to have a strong marketing plan developed that will minimize price uncertainly.
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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