October 7, 2019

Tightening Milk Supply May Result In Higher Prices

 |  By: Robin Schmahl

Class III futures have shown substantial volatility over the past few weeks. Hopes were raised with the substantial increase of milk futures only to be dashed once the prices topped out with contracts almost losing all of the gains. Futures tried to regain some of the losses last week only to have the gains taken away by the end of the week. The market seems to be trying to find a level at which business will be done and price will be competitive on the international market. 

It is unlikely cheese prices will reach back up to the highs it reached two weeks ago through the end of the year unless domestic demand increases. Buyers seems to be getting sufficient cheese without having to be very aggressive. Both cheese and butter buyers have been purchasing for expected upcoming demand without difficulty. 

However, even if prices cannot move much higher over the next three months, overall milk prices will be significantly better than last year. The All-milk price for August increased $0.20 to the highest price this year of $18.90. The August 2018 All-milk price was $15.90. This compares to an All-milk price average for 2018 of $16.10. The All-milk price average so far this year is $17.79. This certainly is much better, but it does not feel as such. There is catch-up being down after 4 1/2 years of low milk prices with many farms still operating under interest only payments. It may take another year for this to change.

Farms are still exiting the dairy business with cow number declining on a monthly basis. However, milk production has yet to fall below last year as milk production per cow continues to remain higher. Some milk plants in the Midwest report tighter milk supply with spot milk prices as much as $1.50 over class. The reports of tighter milk supply does not necessarily mean there is a shortage, but indicates supply is not as flush as it had been. 

This points to a potential issue possible next year or even later down the road. Some processing facilities over the past few years have reduced the number of patrons they have shipping milk to them. The reasoning was that they wanted to maintain patron milk at 85% or there about with the idea of purchasing milk in order to keep plants operating at capacity and filling orders. In that way, they would not need to sell extra milk during spring flush at a discount. The issue will be if cow numbers continue to decline as well as milk production. This would create a problem as the milk available on the spot market will be sought after aggressively with prices significantly higher. This could be setting up for that next year depending on feed quality and quantity. 

There have been a number of years during which milk supply was burdensome with plants implementing short-term supply management with some milk being dumped in the Northeast due to supply. That did not happen this year and the trend could tighten milk supply further which could swing the pendulum the other way for a period of time. If it does, higher milk prices will be the result.