June 12, 2020

Pandemic, Presidential Election Creates Additional Market Unpredictability

Top Story  |   |  By: Ryan Yonkman

Over the course of the Covid-19 outbreak, milk processors/buyers have found themselves at the end of two extremes in a very short time frame. On one end of the curve, we have what we lived through in April where milk and cream was being dumped around the country, especially in the heavy cheese production regions due to a major imbalance of the supply-demand curve and foodservice orders hitting rock bottom.  

With what looked to be very little government intervention, the market was left in producers and processors hands to re-balance the equation. Many production schemes were implemented to cut milk production 10+% as manufactures worked to spur both domestic and foreign demand. In the trough of our milk prices (1.00 cheese and 1.10 butter), we did exactly that as we heard a good round of exports were able to go off as U.S dairy products were the cheapest in the world. At about the same time, producers responded by cutting milk in key regions, and some states started to re-open, bringing much needed foodservice orders back into the marketplace. It was a combination of this and some summer weather that brought us into a much more balanced market with prices and products rallying around 20-30% off their lows. 

Our U.S market had cleanly transitioned from very long to balance with no reports of milk or cream hitting the ground. Then, like in a good old-fashioned game of Euchre, our administration played a very unexpected “Trump Card”. A solicitation to purchase $300+ million pounds of milk and dairy products over the next couple months via the “blue apron” style food box program. It was this news that transitioned the U.S from short-term balanced to Short. Multiple manufacturers were reporting being sold forward as exports and U.S foodservice orders continued to creep back online. This created a funnel higher as market participants scrambled to find product to meet their awarded commitments to the food box program. And just like that, we watched cheese rally from 1.00 on its low point to 1.30 at a point of organic balanced to the an all time high price of $2.585 (that is $24 Class III and is 250% off its low made 45 days ago). This will go down labeled a pretty historic short squeeze on the back of very large front-loaded order from the government. Butter also got a lift of this rally from 1.10 to 1.30 to current price of 1.95.       

What do you do with this rally? From a producer’s perspective, we strongly encourage that if you are not already comfortably hedged that you use this government granted gift of a rally to get your dairy hedged. If you are already hedged, consider rolling coverage up on CME or maxing out DRP. As we look beyond the next 30 days and assess why we are where we are, it becomes pretty clear there is still immense risk riding on domestic foodservice demand. 

By end of this month almost all states will be in some form of phase 2 or 3 opening, but this on its own will not replace all the demand lost as most bars and restaurants will have to continue to run at around 50% capacity. Align this with a confused consumer, a price signal that just told producers to make more (and in some cases asked them to, as we have seen milk handlers remove production cap schemes in order to try and help meet current front loaded demand), the fact COVID-19 is by no means gone, a shaky economy, and you have a market place still filled with risk. 

The last point we want to make is this: Maintain your flexibility in milk marketing. In this environment (COVID-19 pandemic and election year) the government is unpredictable with its spending. As obvious as the downside risk may be, you cannot rule out government intervention. With this mess of news, we encourage dairies to focus on options both CME and DRP where you set a floor and leave yourself breathing room for government-influenced rallies like this. Our advice is to be quick to protect survivable prices with hedge products like DRP or CME puts and slow (very calculated) to market aggressively with things like futures or forward contracts.  


*The risk of loss trading commodity futures and options can be substantial.  Investors should carefully consider the inherent risks in light of their financial condition.  The information contained herein has been obtained from sources to be reliable, however, no independent verification has been made.  The information contained herein is strictly the opinion of its author and not necessarily of Rice Dairy and is intended to be a solicitation.  Past performance is not indicative of future results.