September 23, 2019

What Is the Current Dairy Market Reflecting?

 |  By: Robin Schmahl

Class III milk futures came to life during the month September showing the greatest volatility since 2015 and the largest price swings in a long time posted two limit moves in the same contract over the course of four days. The real question to be considered is: Which move was correct? The monumental increase of the October contract seemed to be a product of the exuberance of buyers as they chased the market higher leap frogging over each other trying to purchase supply prior to yet another price increase. Underlying fundamentals did not suggest the supply of cheese was tight or that there was any large demand surfacing. It seemed to be a product of a buying frenzy. This seemed to create a void under the market is which buyers were willing to purchase once the buying frenzy ran its course. However, on the other hand, the quick decline which followed may not have been the proper reflection of the market.

Cheese demand both domestically and internationally overall has been holding well. Cheese is one of the few categories in the dairy export market that shows a gain over the last year. Inventory is supportive due to the fact that American cheese inventory were lower in July that at the beginning of the year. This is very unusual as inventory generally increases during the first half of the year. This set the stage for the steady increase of block cheese price since the beginning of the year and for the quick increase experienced recently. The movement of price was overdone to the upside and after the price correction, it should find support at a higher level that had been prior to the increase.

So where should the market be? All dairy farmers would like the price to continue higher in order to increase cash flow and improve the financial position of the farm over time. The August Milk Production reports showed milk production remains strong with fewer cows. The August Livestock Slaughter report showed that farmers may be holding onto cows a bit more as milk prices improve. However, there may be very few expansions taking place as banks are not interested in increasing loans for dairy operations. The period of low prices has been too low for too long. This should lend some support to dairy prices as milk production improvement will come from production per cow and not cow numbers.

The large moves that took place in the October Class III futures contract were not reflected to the same extent in later contracts for 2019 and certainly not for 2020 contracts. These did not move as much due to traders remaining cautious and keeping a discount anticipating higher prices will not hold. This idea stems from the past few years as premium had to be taken out of the market as the contract come to a close due to underlying cash prices underperforming expectations. Traders have a tendency to look back over their shoulders and trade according to previous patterns.

The volatility that seems to be developing in the market may remain through the end of the year as supply and demand is assessed. Price swings that may develop can be wild as we have just experienced, but these swings do provide opportunity for hedging milk prices at levels we did not expected this year. It may be difficult to hedge good prices next year due to the substantial discount exhibited in those contracts at the present time.

Upcoming reports:

  • August Cold Storage report on September 23
  • Last day to sign up for the Dairy Margin Coverage program through FSA
  • August Agricultural Prices report on September 27
  • Quarterly Grain Stocks report on September 30
  • August Dairy Products report on October 4


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 The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.