cows
October 21, 2020

How Accurate Are Price Projections?

 |  By: Robin Schmahl

There has been much analysis and predictions made over market potential and direction this year and most of it has been wrong. But maybe not completely wrong. There have been predictions made for the level of prices that may achieved. Prices did move both up and down, but the extent of those moves were far greater than anyone anticipated. I receive an email update about once a month in which price projection as made for the next twelve months. The projections are not just for milk prices, but also for cheese prices and component prices. The interesting thing of these projections is that they change continually each month. USDA does the same thing as they make average milk and dairy product price projections for the current year and the next year on the World Agricultural Supply and Demand report each month. These projections are changed each month due to what transpired since the previous estimate. Generally, if prices have been moving higher, the estimates were raised. If prices were moving lower, estimates were reduced. I believe those truly are not price projections. They are price reactions based on what is happening.

Projecting prices upwards to a year in advance in very difficult as there are so many factors involved that can change rather quickly. This year is a prime example and obviously one that has been unprecedented. An average year is one that can be difficult to make price projections, but they can be made reasonable well through looking at current fundamentals as well as looking at historical patterns. I do hold that once price projections are made and production levels estimated, they should be held to throughout the year to make them an actual projection. Otherwise, we should call it what it is and that is a reaction based on what is taking place and has taken place over the past month.

I was once asked to provide a projection of what cheese prices may be over a five-year period by a company that was looking for a brokerage firm with whom to do risk management. That was a question that no one could answer. Many times a reasonable estimate can be made for the immediate year when considering an average year, but further out than that is basically impossible due to the many factors that can change.

Right now cheese prices seem to be on track to challenge the highs reached in July keeping an incredibly volatile year alive and well. Buyers continue to remain aggressive in the cheese market as the demand for fresh cheese is strong. Consumers have turned to nutritional dairy products during the pandemic resulting in a strong increase in fluid demand and strong interest in cheese at the retail level as more people remain at home for meals.

Dairy exports have been good posting an increase of 16% for the first eight months compared to the same period last year. Cheese exports are 2% above a year ago over the same period of time. Milk powder and whey exports are strong keeping supply moving and limiting inventory build.

It has been and will continue to be unfortunate that farmers will not be able to take advantage of strong prices due to the wide spread between Class III and IV prices as well as the lag of Class I on some of the volatile price moves resulting in significant negative Producer Price Differentials. September did show low negative numbers, but that will not be the case again for October due to the large spread between the classes. However, various government programs have made up for much of the difference through direct payments as well as supporting overall prices as a result of purchases for the Farm to Families Fox Box program and free school meals. This has put many farms in a good positions to make improvements and keep barns full of cows. All in all, it may not be a bad year.

 

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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