Markets Remain Abnormal
Dairy markets are beyond anyone’s estimates or wildest expectations. It gives me the impression of a market that is out of control. I know that statement is stretching it a bit, but to see an incredible spread between block and barrel cheese and a market being somewhat content with exceptionally wide spreads this year is a testament of the difference in fundamentals of each. Demand for blocks has far outweighed the demand for barrels creating a dynamic change in the market. No longer does the market operate best at a narrow spread between blocks and barrels, but is operating according to the supply and demand of each category. Manufacturing facilities do not switch production between the two categories depending on which provides a better return as many of them have do not have the capability to do so. This adds another dynamic to the market and removes the historical movement of the market of which provided some sense of market analysis.
The coronavirus and the uncertainty it has created not only in this country, but around the world has added an element that is hard to predict. The difference between cheese and butter demand and inventory has played havoc with dairy pricing. This seems as if it was going to rectify itself by the end of the year, but this no longer seems to be the case. Anything can happen, but it is unlikely this will change over the next three months.
Even with the uncertainty of milk prices and periods of time with milk income running below the cost of production, milk production continue to run higher than last year. Cow numbers are higher than a year ago with milk production outpacing lasts year as production per cow rises. The recent milk production report for the month of August is testament to the desire to push milk production to improve cash flow. So far this year, milk production has fallen below last year only during the month of May. Strong milk output has not been detrimental to the market as we experienced the second highest Class III milk price in history in July. After the recent one-month severe price decline, the market has come roaring back gaining two-thirds of what it lost during the month of decline. It is possible the market could move similarly through the end of the year with price peaking at some point in the not-to-distant future and then falling back through the end of the year.
It has been a difficult year for hedging milk production due to the severe negative Producer Price Differentials (PPD’s) that have been experienced and are yet to be experienced. This is an unusual year and one that hopefully with not be experienced again. Do not let this year sour you involvement in marketing. It remains important for producers to know cost of production and the look at the market for the best way to protect milk prices. Some who have utilized various strategies have been able to benefit depending on when those strategies were implemented. Dairy Revenue Protection endorsements at times were established at lower prices only to have Class III futures prices rise significantly. A strategy of using put option spreads at higher prices per individual months to provide downside price protection to cover the price gap from higher prices to the level where DRP coverage would kick in worked well for some months. This allowed the capturing of some higher prices even if DRP did not or may not provide coverage. This may be the time to effectively implement this strategy again with the current run up of prices. You can still cover the same amount of milk due to the fact that are providing layered price protection. Different markets provide different opportunities. Rather than sitting on your hands and just watching the market, you need to be proactive. Let me know if I can be of any help.
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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