March 18, 2016

AgDairy Market Update: Milk Futures Appear to be Panic-Driven

 |  By: Robin Schmahl

It is good to see spot cheese and butter prices continuing to trade sideways despite bearish fundamentals. Unfortunately, prices are substantially lower than we would like to see compared to 2015 and 2014. Outside world influence would suggest cheese and butter prices would be lower than they are, but we are glad this is not the case. We can thank strong domestic demand for this. Exports remain slow and somewhat in line with last year according to the January report. We should not expect any support from that arena anytime soon. The bright spot has been strong exports of nonfat dry milk/skim milk powder. January exports increased 23% from a year earlier with 2015 exports and are 9% above 2014. However, this has not been enough to lend support to other categories. Nonfat dry milk/skim milk powder prices are competitive in the world market while most other categories are not. Whole milk powder, despite low price, is struggling as January exports were 58% below a year earlier and 169% below 2014.

An extended outlook for low world dairy prices from international analysts has recently resulted in substantial bearishness rippling through Class III futures contracts all the way through 2017. It is somewhat unusual to see substantial price premium to be eliminated from futures contracts that far out. In light of the saying that low prices cure low prices, one would think 2017 futures contracts would have held premium well despite the current lower spot prices. After all we are looking nearly 1-2 years ahead. Thus, it is unusual to see the selling pressure throughout 2017 contracts. Just last week, we saw many contracts suffer 30-35 cent losses and in fact, since early February we have seen all 2017 contracts decline between 50-90 cents.

International analysts such as Rabobank have continued to push back estimated world price recovery into 2017. Fonterra also released a lower price estimate for this marketing year. This has increased the concern for dairy prices and has triggered panic selling throughout 2017. Hedgers have looked ahead to any contracts that offered some profitability as well as psychological levels that could be protected and provide some hope of weathering the storm in a little better position that what milk prices are now. Even though it is a long way out, they are doing what they need to do with the intention of offsetting or protecting those positions if market fundamentals dictate otherwise. Light volume and open interest in 2017 contracts magnifies the movement as a few trades can significantly move the market. However, futures have not rebounded from traders believing prices have been oversold to the downside. Unfortunately, this would indicate traders seem comfortable with prices at current levels and unless outside influences dictate, futures price increases will be difficult to materialize.

How long it will take before low milk prices will impact milk output is difficult to predict. USDA estimated lower milk production in their latest World Agricultural Supply and Demand report. They lowered the estimate by 300 million pounds to the current estimate of 211.6 billion pounds. If this comes to fruition, it would be an increase of 3 billion pounds over 2015. However, if milk prices remain low, milk production will likely result in a significant contraction of milk production.

I continue to recommend put option spreads $1.25 apart for later contracts. Purchase put option where the futures are trading and sell put options $1.25 lower for a cost of about 50 cents per contract. If underlying cash prices remain in the current range for an extended period of time, these positions will help the farm operation immensely. The beauty of this strategy is that it leaves the upside completely open for higher milk prices if they develop. It provides some downside protection, but is limited to the level of the sold put. However, this is better than doing nothing and just hoping for higher prices.


Upcoming reports:


  • February monthly Milk Production report on March 18
  • February monthly Cold Storage report on March 22
  • April Federal Order advances Class I price on March 23
  • February monthly Livestock Slaughter report on March 24
  • February Agricultural Prices report on March 30
  • Prospective Plantings and Grain Stocks report on March 31


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


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