Stronger Milk Prices May Hold
We have experienced price fluctuation of milk prices so far this year, but price movements have not been excessive. Class III price has had a range of $1.66 from high to low. If current futures prices come to fruition, that range will be extended with some contracts above $17.00. Class IV price has fared a bit better with a range of $2.11. Last year, the range of Class III price during the same period was $2.48 and for Class IV it was $2.16. Price swings in 2016 were greater, but milk prices were not. The current average Class III milk price is $2.36 better than last year with Class IV running $1.88 higher. The All-milk price is running $2.24 better so far this year. This certainly is cause for rejoicing, but it does not feel like it has put much more in the checking account.
There has been much debate over how much profitability there is or is not at current milk prices. Of course, that all depends on cost of production and debt per cow. The bottom line is that cow numbers continue to increase indicating that some farms have the ability to expand. The first half of 2016 U.S. dairy cow numbers increased 10,000 head due to lower milk prices. The first half of this year showed an increase of 50,000 cows as a result of higher milk prices. Even though there is discussion about the lack of profitability even at current milk prices, there are farms that are expanding either with additional facilities or by increasing within current facilities.
Current milk futures indicate higher milk prices may be on the horizon if those prices hold. This will improve milk prices over last year immensely. It appear feed prices will also be reasonable as the current crop looks better than anticipated during June and July. This will be a blessing to those in drought areas that will need to purchase more feed. Generally, reasonable feed prices means lower milk prices, but that may not the case this year.
Export demand continues to improve which increases export opportunities and supports prices. Cheese exports in June were 32% higher than last year with year-to-date exports up 24%. Butterfat exports are increasing substantially with June exports up 254% over June 2016. Year-to-date butterfat exports still lag last year by 6%, but improving rapidly. The U.S, is the third largest producer of butter with an output of 890,000 metric tons which is less than consumption in our own country. European butter imports meets the rest of demand in the U.S. The World butter market is tight as consumption has improved significantly which will continue to support butter price and improve milk prices. It is interesting to see how exports of butter are an important part of business while at the same time demand is greater than production. In essence, butter is exported while the amount exported must be imported and then some in order to balance supply with demand. It certainly is an interesting world we live in. It is said that the food items we purchase in the grocery store has traveled an average of 900 miles.
With demand increasing both domestically and internationally, it appears milk prices may remain strong through the rest of the year. Yet, the price swings of milk futures give the impression that things can change rapidly. Just a few weeks ago, September and October Class III milk futures fell about $1.00 over the course of one week. About half of those losses have been regain again. It does indicate that prices are susceptible to downside price risk making it imperative to protect milk prices on rebounds that take futures near the highs for the year. Option strategies are the best approach providing flexibility.