Uncertainty Causes Increased Market Volatility
Milk futures have become more reactive to underlying cash movement this year than they had been in the past. Previously, milk futures would move relative to price movement during spot trading, but much of the movement took place after spot trading was finished. The main reason for this was that it was an open outcry system with most not knowing what cash prices did until trading was finished. Floor traders would see what was happening with futures price movement providing a good indication as to what spot prices did.
Electronic spot trading replaced open outcry which then allowed anyone to know what was taking place as it took place. But for a period of time, most of the reaction become evident once spot trading closed due to price movement being more limited and trending. However, this year has changed that with traders reacting almost immediately with any price movement during spot trading. This is due to the increase of price volatility in the spot market itself. During the course of spot trading, cash prices have been and are swinging wildly over the course of a week and sometimes even during a single trading period. Price movement in milk futures has sometimes been substantial over the course of the short spot trading period.
The benefit of electronic trading is that anyone can see what is taking place as it take place. There is no more waiting to see what spot prices did or no more calling the floor traders in order to find out what took place. It is now a completely transparent market which has been goal of the CME for a long time. The downside is that no one knows who is buying or selling providing no indication as to possible strength or weakness of the market. During spot trading, floor traders knew what companies were buying or selling which did provide indication of market trend.
This has been an unusual year due to the impact of the coronavirus which has created more volatility and large price swings which has basically eliminated seasonal price movement and replaced it with uncertainty and price movement based on USDA program announcements and the aggressiveness of buyers and sellers of product. There are about four months remaining to the year and considerable volatility is expected.
Despite the significant volatility that has been seen so far this year and the inability of farmers to take advantage of the record high cheese prices due to the Federal Order milk pricing system, milk production continues to increase. Various government programs to provide money directly to farmers to help offset low prices along with providing money to purchase products for the Food Box program has offset quite a bit of the low prices realized during the periods of low milk prices. This has kept cash flow in the positive for many farms allowing them to continue to remain in business. There were numerous reports of farms using some of the Coronavirus Food Assistance Program (CFAP) money to purchase cows to add to the herd and increase milk production. Farms are still exiting the business, but cow numbers and milk production are not decreasing.
There have been some changes in dairy demand this year that have been positive and have improved demand through retail channels immensely. There are however, some areas that have struggled and will continue to struggle. Hopefully, overall domestic and international demand will be strong enough and continue to grow to keep supply from exceeding demand.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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