Milk Truck
August 7, 2018

Milk Price Doesn’t Tell Whole Story

 |  By: Mike North

A discussion about marketing milk and managing the risk surrounding milk prices in the current price environment is both easy and difficult all at the same time.  It is easy because the risk of lower prices is evident to all that are willing to take an unbiased look at markets.  It is difficult because price opportunities that are currently being offered do not stack up against the hope that many have for the coming year.  In many producer’s minds, prices are too low.  Or are they?

The graph takes a look back at the average price paid in Class III Milk during the first half of all years since the record setting year of 2014.  As of this writing, the average for the first half of 2019 in Class III milk is $15.75 while Class IV is averaging $15.60.  Put plainly, Class III prices for that period are within 37 cents of the highest price average witnessed since the 2014 record.  Today, the Class IV average offering is 52 cents higher than ANY average since 2014.

 

Class III and Class IV Milk Averages*

 

So why the hesitation?  Several things are at play.  Many producers have witnessed an erosion of the “Over-Class” premium that is paid by processors and co-ops on their monthly milk check.  Therefore, the price offering, adjusted to the premiums of days gone by is less attractive.  Additionally, the hope of a trade deal keeps many idled by their own desires of a better tomorrow.

But these “reasons” are exactly why prices should be attended to. The abundance of milk in the continental United States is the very reason why premiums have eroded in recent years.  The market has a way of dealing with oversupply.  Its methods are often brutal and generally work against the least prepared.  It is apparent that prices have not gone low enough long enough to move cows out of the barn and into the packing house.  While hard to hear, it is the cruel reality of our market.

As tariffs complete their first month of existence we are just now experiencing the first declines in demand.  Instead of the momentum building growth in export volume that defined the first half of this year, new trade will have to overcome that which will be lost in the months ahead.  Moreover, any trade deal will have to transform a relationship that has now been compromised into a bond of trust and mutual engagement that was greater than it was before.  That is a lot to ask in the short run.

We are thus faced with the seasonal tendencies of lower markets again next winter and spring. If these tendencies define a “normal” year, what will they look like in a year with declining trade opportunities and oversupply?  With this in mind, dairymen should be actively engaging the market to find strategies that fit their operation throughout that period.  Option strategies that provide protection from lower prices while still allowing for the potential of upward price action (should a trade deal be crafted between now and then) are advised.  Reach out to your advisor or give us a call to sort through some of these possibilities. 

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