December 18, 2017

Milk Prices Were Better in 2017

 |  By: Robin Schmahl

Any way you look at the market, there are heavy supplies hanging over the market. Not only is milk production strong; supplies of products are heavy. Current Class III and Class IV futures do not paint a very positive picture for next year. USDA estimated Class III milk price to average $15.70, Class IV to average $14.35, and the All-milk price to average $17.05 on the recent World Agricultural Supply and Demand report. Although milk prices seem to have been low throughout 2017, they have been much better than 2016. The average Class III price for 2016 was $14.86 while the average Class III price for 2017 will be near $16.18 depending on where the December price is announced. The average Class IV price for 2016 was $13.77 while the average price for 2017 will be near $15.88. I know this is small consolation given current prices and current futures price outlook. Yet, average milk prices would still be slightly better in 2018 than 2016 if USDA’s estimates come to fruition.

One area of great concern is the price of whey. Dry whey price on the weekly Agricultural Marketing Service report has shown dry whey price almost consistently declining since mid-April. There have been a few slight increases some weeks, but price weakness quickly resumed. The price peak was reached in April at 53.39 cents per pound with the most recent price recorded at 29.09 cents per pound. This is a decline of 24.30 cents which equates to a decline of $1.46 per cwt for the Class III price. USDA is not very hopeful for dry whey price in 2018 with their current estimate of an average price of 32.50 cent. Dry whey futures are less supportive with much of next year showing an average price of around 25 cents.

Whey exports have been positive all year with January-October exports up 8 percent from the previous year. Dry whey exports are 11 percent higher year-to-date. In fact, whey exports have reached all-time high volumes this year despite steadily declining global prices. China has been a big buyers of whey. Yet, that still has not been enough to support prices. There is a plentiful supply with strong cheese production keeping supply available. Current low prices should stimulate demand and eventually result in higher prices.

U.S. milk production is expected to increase next year setting another record, but prices are expected to decline. Declining milk prices generally will begin to curtail milk production over time. The first reaction is to increase production to make up for declining prices. Eventually culling with increase and cow numbers will decline. However, this will take a while. Lower prices will improve demand and eventually result in higher prices, but the duration of those lower prices in an unknown.

My recommendation is to not forward contract or use futures, but to only use options as damage control and to allow for flexibility. You certainly do not want to hedge a milk price without the ability to capture upside potential.