Exports Provide Milk Prices A Glimmer Of Hope
While basis continues to be significantly suppressed in most of the country, exports are up going into the summer nudging milk futures higher too. Mike North of Commodity Risk Management says there’s still hope for milk prices to reach breakeven levels in 2018.
“We had a really good [export] run the first quarter. We're waiting on April numbers yet but that looks to be a fairly decent month,” he explained to U.S. Farm Report host Tyne Morgan. “Bottom line is that as we talk about the landscape, the global economy has been very strong this year.”
An uptick of interest for dairy products throughout Southeast Asia, and growing demand in the Middle East and North Africa is promising for milk markets, he said.
“Higher crude oil prices have put more revenue in their economies and they've been buying more milk powders and proteins,” he said adding this kind of demand surge is hard to predict because you don’t know how these countries will spend their increased GDP.
“We saw this on the last run in crude and so as crude oil prices came down their demand softened,” North explained. “Now that it's on the way back up and we have $71.50 crude we're seeing again some increase interest for dairy products.”
Still, farmers are struggling with extremely weak basis, North explains.
“So, the prices that are paid above and beyond the base levels that are what you see on the board that the USDA announces every month there's been a premium that's historically especially in the upper Midwest that's been paid above and beyond that,” he said. “Those have shrunk as greater milk volumes have been present processors as they've had to go back and sell milk into the open market at a discount have taken too steep of a loss and as a result, premiums have softened over the course of the last year.”
According to North, the futures values we’re seeing today which are hovering around $15 don’t quite get most producers to breakeven point.
“But by the time we get to summer and we're looking at $16, $16.50, those values do,” he said.
Despite the current series of price runs, whether or not milk markets can sustain their current trajectory remains unknown.
“The reality is last year we had a really strong start demand looked really good and then it softened or maybe a better phrase ‘it didn't live up to its expectations’ for the third quarter and as a result we didn't see the drawdowns in inventory the way we had hoped,” he said. “So, it was kind of a very flattening event for the market and it forecast some pretty negative price forward into 2018.”
According to North, analysts hope exports can help give the market a nudge in the third quarter.
“Well the reality is profitability is a function of both feed costs largely on the input side and milk price,” he said. “And so, if we have a runaway on the grain market that's going to keep pressure on that profitability all through the summer. One thing that would be helpful is a great crop year, an abundant supply of feedstock. If there's plenty of feed in the country, that will help maintain a little better profitability going into the fourth quarter.”