Volatility
September 25, 2018

Is There Upside Potential for Milk Prices?

 |  By: Robin Schmahl

Late last year there was a strong feeling that this year would see significant upside price potential. The reasoning was that milk prices had the tendency to move in a three-year cycle and 2018 was the year of stronger prices. The result was those who held this view did not take any action to protect Class III milk prices when they reached the high $16.00’s up to $17.00 for a brief period of time. I recommended option strategies which sold call options at $18.50-$19.00 in conjunction with the purchase of put options to allow for the opportunity to take advantage of higher milk prices up to the sold option level. Many fundamentals did not seem to indicate that milk prices were going to follow a three-year cycle this time around. This may be the case in 2019 if some of the political uncertainty is settled and we see cow numbers continue to hold below year earlier levels. However, that seems to be a bit suspect as we look ahead to the future. 

Dairy cattle slaughter increased substantially in August with 39,900 more cows slaughtered than the month of July and 14,100 more that August 2017. This seemed to indicate increasing slaughter should decrease cow numbers and eventually tighten milk supply. However, despite the significant increase in cow slaughter, the nation’s dairy herd increased 5,000 head. This indicates there were many replacements waiting in the wings which took the place of those slaughtered and then some. It is possible we could see something similar for September if the decline of cow numbers was only temporary and heifers continue to move into the herd. 

I continue to hear reports of farms looking to expand. It makes one wonder why plants are allowing expansions to be planned and take place after a period of time earlier this year during which no one wanted anymore milk. Some farms wee told their milk would not be picked up anymore with some of these farms unable to find a home for their milk and had to go out of business. Is higher milk production being encouraged now that there is room in plants only to initiate quotas next year or eliminate farms again rather than divert milk at a discount? 

The best scenario is to increase both domestic and international demand. Progress is being made on a new North American Free Trade Agreement which should assure a strong export market to Mexico and Canada. The elimination of U.S. and Chinese tariffs seems to be a long way off at the present time. However, there are many other international markets that can be pursued and provided with excellent quality dairy products from the U.S. 

October 9th is the date when milk producers can begin to choose quarterly coverage under the Dairy Revenue Protection insurance program. USDA’s Risk Management Agency has not yet released daily quotes for either the Class Price Option or Component Price Option nor the premiums that will be associated with any of these choices. To my understanding, they will not have this up and running until October 9th with quotes located somewhere on their website www.rma.usda.gov. Those who are not familiar with this insurance program do not need to feel pressured into signing an application with an insurance agent by this start date. You can sign up for it at any time. The determining factor at the time of signing an application may be which quarter you can begin coverage. Most are in the midst of harvesting and will be very busy over the next month or more and will not want to add anything else to their list of things to do. You have time to think about this and sign up for it. My recommendation is to take your time. Work with a crop insurance agent that understands dairy and can help you with using this as a risk management tool. Become knowledgeable and somewhat comfortable with you understanding of the program and do not just spend money on this without knowing what is being protected. I can help you with this.

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