markets
December 17, 2019

Have Milk Prices Fallen Too Far?

 |  By: Robin Schmahl

What goes up, must come down and down it came. Cheese prices were anticipated to decline as some point, but the magnitude of the decline of barrel cheese was unprecedented. Barrel price falling 53 1/4 cents during the week of December 9-13 sets a new record. However, they did not stop there, but fell another 8 1/2 cents on Monday. This moved price from the highest price of the year at $2.39 only to fall back to the level is was on June 17th

Generally, when price moves this dramatically, price retracement usually follows. However, there is no indication from what level cheese prices may rebound. The magnitude of the decline of barrels feels like there is something wrong. A few weeks ago, it was reported that barrel manufacturers were behind on orders as they scrambled to fulfill demand. That changed rather quickly with sellers trying to move product as quickly as possible and at whatever price they can get. This fuels the fire as aggressive selling causes buyers to hold back waiting to see just how far the market will be pushed. Holiday orders are filled with buyers turning their attention to first quarter 2020 demand. However, there is little concern over supply keeping buyers confident prices will be lower for a period of time. 

The big question is, “Are cheese prices overdone to the downside”. Looking back historically at price charts one would say that they are ready for a bounce. However, dairy markets really do not trade much on a technical basis. Milk futures and milk prices will follow underlying prices and weekly AMS prices. Dairy futures are not the price discovery mechanism as they are with some other markets. 

Class III futures have turned very bearish, very quickly. Discounted prices in 2020 contracts took a long time in order for traders to feel more comfortable prices were going to improve and began moving higher as cheese prices continued to increase. However, that was short-lived with the market now eliminating any gains from mid-October. 

The recent news of USMCA moving forward and a Phase 1 agreement between the U.S. and China has had no impact on the market. In time, greater exports of dairy products might be the result, but it will take time. China has been a large buyer of whey for their hog farms. However, with approximately 40% of their hog herd having been destroyed as a measure to contain the disease. This has reduced their imports of whey dramatically and will remain substantially lower even though tariffs are reduced. It the demand is not there, it does not make any difference what the tariff level is or that an agreement is made. 

Thus, the market is doing what it always does and that is moving price according to supply and demand. There are times when prices will move higher or lower than underlying cash for brief periods of time as either buyers or sellers will hold back waiting to see how aggressive buyers or sellers will be, but prices will move back to an equilibrium where they should be. I would venture to say the market might be overdone to the downside, but a price correction may be limited.