Will Extreme Volatility Become Normal?
Wild market price swings are become a normal part of dairy markets this year. There is almost a new record of something that is being set every week. The records are not only being set in the futures market, but the daily spot markets as well. It was predicted that markets will see extreme volatility and that certainly has been fulfilled with another nearly five months of the year left.
On top of the volatility that has been exhibited due to the coronavirus, other markets such as the DOW, indexes, energies, metals and livestock have had their share of volatility. These other markets do have some indirect influence on dairy markets. We can also throw an election year on top of that to round out the reason for the volatility.
Block cheese price has shown a record price decline over a brief period of time. Price has fallen 46 cents in 11 days with the price on Friday, July 24 reaching the lowest level since June 18th. The last time we have seen a price decline of this magnitude was November 2014 with block price fell 47 cents over the period of 14 days. If we put this in the perspective of trading days, the recent decline of 46 cents took place over 9 trading days while the decline in 2014 took place over 11 trading days. The strange thing about the decline this time is that it does not feel as if the price has fallen as much. The reason is that Class III futures have been carrying a substantial discount in each subsequent month through December. Thus, the falling cheese price, although creating substantial volatility, did need to erode Class III futures at the same pace. The market is trying to predict price weakness and converge to the underlying cash. Futures contract inversions outside of seasonal pricing are not very common, but they do happen.
The unexpected and unprecedented volatility has resulted in record price spreads between butter and cheese, Class III and Class IV and Class I and Class III milk. The result has been record negative Producer Price Differentials (PPD). June negative PPD’s were the largest on record which caused disbelief and much frustration. However, the reality is that July PPD’s may be a little worse that June. Class III price will be about $3.35 cents higher than June while the Class IV price will be only about 75 cents higher. One benefit in some areas will be jump of over $5.00 in the Class I price. So there will be as much variation in July PPD’s as there was in June across the Federal Orders.
Prices will come back together again as some point. The cheese and butter prices spread will move back together remaining within a close proximity with each other as they usually are. The June Cold Storage report may be some light at the end of the tunnel for butter as inventory declined seasonally and was 11% higher than June 2019. The previous report for the month of May showed inventory 21% above the same month last year. Progress is being made to reduce inventory, but the lingering concern is demand from the food service industry. Coronavirus cases in the country are increasing rather than decreasing and the more infections increase, the more the potential spread. Some health officials have called for shutting down the economy is some areas again as various hospitals are overwhelmed. This will assure more dairy products will be consumed at home, but whether this can balance the loss from the food service industry is yet to be seen. However, inventories declined in June in all categories which holds out hope overall demand will absorb production and reduce inventory. It is a strong possibility that cheese prices will weaken while butter price strengthens bringing prices back together.