Is There Really Too Much Milk?
Milk futures have taken a beating over the past month with prices experiencing very few days of higher closes. Technically, futures should be about ready to rebound in price retracing some of the losses experienced during that period of time. However, milk futures do not always follow the usual that many other market do. Traders may apply some principles of technical analysis and trade accordingly, but futures are not the price discovery mechanism that is a part of many other markets. Daily and final prices are the result of underlying cash prices. Daily movement of spot prices for cheese, butter, and nonfat dry milk is what drives the industry and determines final prices, not technical analysis. Class III futures are very oversold, but unless spot cheese prices trend higher, it will not make any difference. The key idea is that it will need to trend higher. Last week, cheese prices experienced a nice increase, but futures prices declined in spite of strength in the underlying cash. The overall attitude is bearish and the spot market will need to prove itself by maintaining an uptrend for a longer duration and have the fundamentals to indicate the trend is solid.
The bottom line is that there is just too much milk and product out there to warrant much higher prices. Yes, prices could increase to some extent and hopefully we will experience Class III futures back to $17.00 again before the end of the year, but there is significant lost ground to regain. Summer weather is now basically behind us and with it any impact from sustained hot weather. The next item on the horizon is holiday and end of the year demand. That certainly can reduce inventory and available fresh supply, but we much remember that milk continues to be produced every day and demand must exceed supply in order to reduce inventory. If the current trend remains intact, we will end this year with higher levels of cheese in inventory than last year. This would make it the fourth consecutive year of higher inventory at the end of the year for total cheese and the fifth consecutive year for American cheese.
However, higher inventories do not always indicate lower milk prices. Record milk prices were seen in 2014 despite high and increasing inventories. Exports played a key role in those record milk prices. Exports are improving this year which could go a long way in supporting milk prices if international interest continues.
Exports during the first half of the year were strong with volume the most in three years. However, that was tempered a bit in July. After twelve consecutive months of year-over-year growth, dairy exports declined in July. The volume of exports was down one percent from last year. This really is not a concern as exports will fluctuate depending on shipments. Cheese exports continued to increase with a gain of 14 percent with butterfat exports up 66 percent. So far, the aggregate volume of exports for the year are up 11 percent with total value of those exports up 21 percent. Export interest should remain strong as U.S. prices are very competitive with world prices. The latest GDT auction showed world butter price at $2.70 per pound with cheddar cheese price at $1.87. This compares to the current U.S price of $2.4575 butter and $1.6425 cheese.
The decline of milk futures prices for 2018 with first half of the year below $16.00 does not paint a promising picture for a better year. Much can change over the next month, but opportunities of higher prices need to be taken advantage of by utilizing futures and options. Develop a marketing plan and implement it. I know of many that have set a level at which they wanted to sell milk and once price increase near that level, they raise the price or cancel it and end up not protecting prices only to have prices drop off again without any coverage. Yes, sometimes it was beneficial to move or cancel hedge prices, but when this is done it is a speculative move and not implementing a marketing plan to protect prices. A plan must contain price protection and flexibility which can be accomplished while managing risk.