Market Movement: Has This Happened Before?
The volatility in the dairy futures complex has been incredible over the past three months. After a period of substantial decline since mid-February through April 22nd, the market reversed direction violently. Class III futures regained nearly all of the losses suffered after news of the coronavirus sent the markets reeling. Outside influences from the economic fallout in most countries, the shutting down of countries, states and cities in the attempt to slow the spread of the virus had a major impact on most everything. Imports and exports slowed with some ports shut down for a while. Manufacturing and processing disruptions abounded. The food service and hospitality industry was decimated. The impact of the virus and closing of businesses was so abrupt, businesses had no time to prepare resulting in an unprecedented turmoil affecting the whole world.
The U.S. dairy industry began being concerned over the impact this could have during the month of February Prices began to show some weakness due to the potential for the loss of exports for a time. However, the full impact was realized with markets reacting in mid-March. Once the shelter-at-home mandate was initiated, the food service industry canceled orders for dairy products and prices crashed. We all know the results of what then took place as we saw the industry dealing with something none of us have ever lived through.
None of us have ever lived through a whole world pandemic. We do not know how long this will last or what the whole impact will be financially. There has been much speculation as to the duration of COVID-19 and how it will change the world in the future. The financial impact will be difficult to determine.
The recent movement of prices in the dairy industry does point to a short duration of impact. June Class III futures have increase $6.00 per cwt in less than a month. Cheese and butter prices rocketed higher as buyers began leap frogging over each other in their attempt to purchase product at the lowest possible price. The problem was that those who came back into the market after waiting to purchase due to price weakness, ended up paying substantially more for their product that they wanted. As prices marched higher, buyers became more aggressive as the market fed on itself. Looking at current prices, one would have the impression that the impact of COVID-19 is behind us and most everything is back to somewhat normal again.
I want to take a look back historically to see whether we had similar price rallies and what followed. Let’s take a look a block cheese. There have been six times since 1999 that have shown significant price increases. In 1999, block cheese price increased from $1.1925 to $1.9725 or $0.78 over a period of 3 months. In 2004, block price went from $1.30 to $2.20 or $0.90 for the period of three months. In 2007, price went from a low of $1.4250 to $2.10 or $0.6750 cents over a period of two months. In 2010, price moved from $1.32 to $2.02 or $0.70 in a little over 2 months. In 2011, price moved from $1.6225 to $2.1125 or $0.49 in less than a month. In 2016, block cheese price moved from $1.28 to $1.8650 or $0.5850 in three months. Now, block price has increased $0.8150 in the past month. The price increase that we have seen from April 15th to May 18th sets a new record in duration of time and magnitude of gain. What make this really incredible, is that it has taken place during a pandemic, record unemployment, a sickness that yet has no cure, a decimated food service and hospitality industry and an uncertain future. Do not get me wrong, I certainly am glad to see the rebound of prices, but am concerned over the ability of the market to hold gains. In all of the years cheese price showed strong gains, the price crashed as quickly or more quickly, than they increased with the exception of 2007. In that year, Price held within a range for over a year before declining.
I wanted to show these comparisons in order to caution farmers over becoming complacent over a better price outlook. If you want to remain in business, you need to implement strategies to manage price risk and the recent price rally has provided an opportunity if you have not done so.