unkown markets
November 20, 2019

Milk Price: Has the High Been Reached?

 |  By: Robin Schmahl

November will be a good month for milk checks for many farmers whose milk pricing is based on cheese prices. Class III price will be the highest for the year and the highest since November 2014. This is a long time in coming and one that is welcomed after 4 1/2 years of low milk prices. However, it does appear that this may be the high for the foreseeable future. Cheese prices have declined substantially over the past two weeks which has pressured Class III milk futures for December.

Futures reached a high of $19.65 on October 31st and have now fallen around $1.20 since then. It would take a monumental effort on the part of cheese prices in order to regain the loss in light of the time of year. Most orders have already been filled for the holiday season with fill-in buying providing any support to prices. Buyers have been unwilling to purchase much for rebuilding aging programs or inventory in general due to the high cheese prices. It is likely cheese prices could find some support at these lower prices at which buyers will feel comfortable stepping back up to the plate. 

The interesting aspect of the futures market is that even though cheese prices have been declining, Class III futures for February through December have been making new contract highs. The reason for this is that the market is attempting to minimize and eventually eliminate the substantial discount 2020 futures contracts have maintained for quite some time. There had been a huge inversion of about $3.00 from November to later contracts.

Now that November is virtually priced and will not move much until the announced of the Federal Order class prices on December 4th, the December contract will reflect the movement of underlying cash on a daily basis. The price inversion between December and 2020 contracts is substantially less and moving back to a more normal market, albeit at lower prices. 

The bigger item that has developed in the market is the huge inversion of the block/barrel spread. Barrels reached to a level of 37 1/2 cents over blocks which was an all-time record. Barrel manufacturers were having a difficult time filling orders as supply tightened significantly. For much of the year, barrel price was below that of blocks. This is normal, but for much of the time barrels were significantly below blocks as supplies were heavy. There has been much discussion of the impact of the wide block/barrel spread on the market and the anticipation of the spread moving back together again.

The historical usual was a block/barrel spread of 3 to 4 cents with blocks above barrels. That is where the industry generally operated most efficiently. However, that has changed over the past years. As cheese plants become more efficient and streamlined, the desire and/or ability of plants to switch from block to barrel production and vice versa has changed with each category operating on their own fundamentals. Thus the wide block/barrel spread has become more of a normal market event. However, barrels are generally below blocks. 

Cheese prices have declined to the extent that buyers should begin to find value. Buyers should begin to look to first quarter needs and be willing to purchase in anticipation of usual demand. The amount of milk supply that will be available to manufacturers and bottlers will be important for milk prices next year. 

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