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December 31, 2019

Milk Prices Highly Sensitive to Monthly Production Changes

 |  By: Jim Dickrell

If you haven’t noticed it yet, milk prices are highly sensitive to monthly milk production changes.

“Milk production reports are having a huge influence on cheese prices and that’s having a huge influence on milk prices,” says Peter Vitaliano, vice president of economic policy and market research for the National Milk Producers Federation.

In 2018 and in the first half of 2019, U.S. milk production finally came under control and markets started to rebound. But production shot up in September and October of this year, averaging 1.3% increase year over year. “That totally spooked the markets,” says Vitaliano.

The November milk production report saw production rise only 0.5%, and “markets breathed a huge sigh of relief” with cheese prices rebounding on the Chicago Mercantile Exchange, he says.

Because U.S. domestic markets are so finally balanced, any increase (or decrease) in monthly production dictates cheese production. Cheese production dictates cheese prices, and ultimately milk prices, he explains.

Every year, large farms are producing more and more of the nation’s milk supply. These larger farms have an uncanny ability to increase milk production on short notice, and those increases are therefore having a larger impact on milk price direction, he says.

High feed prices several years ago, due to ethanol mandates and large exports of grain, had curtailed large farm production because large farms tend to buy most of their feed. “Now, larger operations are seeing some relief (on grain prices) and the pressure is back on smaller farms,” says Vitaliano.

Recent trade agreements will help, somewhat. The USMCA (U.S./Mexico/Canada) agreement will reset our access to Mexico and it will give a little more access to Canada, he says. “But I don’t see it moving the volumes of milk our own farmers are capable of producing.

“It’s the same thing with China. We will regain some of those markets,” he says. “We’ll have to see how much China actually comes back.”

The other question remains: What is the magnitude of those trade gains compared to what U.S. dairy farmers are capable of producing on their farms? he says.

To gain even more market insight, listen to Vitaliano’s entire 18-minute podcast here.