Spot Dry Whey to Aid the Industry
There are some analysts promoting the idea of significantly stronger milk prices later this year. They cite various reasons for these predictions. Some of this seems to be a matter of providing hope and telling people what they want to hear. I certainly hope some of these predictions are true as far as market direction is concerned. It would certainly be beneficial for stronger milk prices to be realized as the year progresses. Domestic demand has been good for dairy products with export demand also showing promise. Export volume of dairy products in January increased 9 percent over a year earlier with exports of cheese and dry whey being particularly strong. This certainly is needed due to continued strong milk production and growth in cow numbers.
We have seen strong underlying support in butter and cheese which has increased the anticipation for stronger milk prices down the road. However, the market is being cautious as seasonality is being exhibited in Class III futures with later contracts struggling to hold near the $16.00 level. Closer months have been moving in a sideways trading pattern as traders want to see the market prove itself.
Front-month March Class III futures will begin flat-lining this week as price is determined for all practical purposes except for adjustments made as weekly Agricultural Market Service (AMS) product prices are reported. These adjustments may become limited due to the beginning of a spot dry whey contract on the CME group on Monday, March 12. This will allow traders to get a better idea of dry whey price on a daily basis rather than a weekly basis. The contract size is 41,000-45,000 pounds and will be quoted in cents per pound. The minimum price fluctuation with be 0.25 cent as is the minimum fluctuation for cheese, butter, and nonfat dry milk spot markets. Trading time will be from 10:45-10:55 Central time daily. This is a welcomed offering by the CME to enhance information used for market price assessment.
USDA is not estimating a very high average price for dry whey this year with their latest estimate showing an average of 28 cents per pound. This would be 16 cents lower than the average of 2017 which translates into a reduction of Class III prices by 96 cents per cwt. This would be slightly lower than the average price for 2016. In fact, cheese, nonfat dry milk, and dry whey prices will be lower than they were in 2016 if these estimates come to fruition. The exception is butter with current estimates showing average price to be 18 cents per pound higher.
Certainly a case can be made either way for market prices this year. Continued low milk prices may eventually result in lower cow numbers and tighter milk supply. However, the current trend is showing that the opposite is happening. The potential for higher milk prices later this year as predicted by some analysts may improve the desire to keep cow numbers at current levels or increase if there is plant capacity in order to capitalize on higher milk prices when that time comes. Our tendency is to increase milk production when prices are low and increase milk production when prices are high. The other element involved now is plant capacity. Dairies need to get an O.K. from the plant before any expansion can take place. Any plant space that may open up at present is being quickly filled by another dairy operation. That trend may continue for a period of time.
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