upward trend
April 8, 2019

Are Higher Milk Prices Here To Stay?

 |  By: Robin Schmahl

Slowly improving cheese prices and, subsequently milk futures prices, have generated excitement over the potential of milk prices this year. Continued low milk prices continue to push farms out of the dairy business. Some exit due to the necessity to sell out because the money has run out and equity is gone. Some dairies are exiting the business just because they are sick of it and want to wash their hands of milking cows and not being paid a fair price for their milk. Those who are going to just raise crops on their land to provide an income rather than milk cows are moving into another part of agriculture that is also struggling. Many grain farmers are not making much money either due to over production and large inventories, in addition to having to compete on the world market. 

It has been an extended period of low milk prices, yet the recent support and strength in the cheese cash market may indicate a price bottom and better milk prices to come. It certainly would be about time. March certainly was an improvement over February with the Class III price being announced $1.15 higher. Class IV was not as fortunate with a price decline of $0.15. Overall, milk prices are headed in the right direction. 

Yet, we need to exercise caution here.

Traders are cautiously optimistic, and we should be, too. Although Class III milk futures are slowly increasing, there remains downside risk. I did a comparison of price movement over the past three years just to see what price movement was during this same period of time. I was surprised to find a similar pattern for 2016, 2017, and 2018. In 2016, June Class III futures increased nearly a $1.00 per cwt from mid-March to the beginning of April. However, price topped and fell back $1.25 per cwt by mid-May. The July contract increased from mid-April to mid-May nearly the same as the June contract, but fell nearly $2.00 per cwt by the end of June. In 2017, June Class III futures moved higher from mid- April to the end of May gaining about $1.50 and then declined $0.55 into the end of May. The July 2017 contract increased into the end of May, but then fell nearly $1.50 by the end of June. In 2018, the June Class III contract increased about $1.60 per cwt from mid-March through mid-May and then fell about $1.00 into the close of the contract in early July. The July contract for 2018 increased nearly $1.50 for mid-March through late May. However, price fell nearly $2.50 per cwt into the final settlement of the contract. 

Fundamentals are different each year, but it does indicate there is risk of a price decline once buyers are satisfied with their ownership of cheese supply. Buyers are adopting the practice of purchasing supply earlier and are willing to pay for storage rather than wait for a seasonal dip in price that may not come. This pattern has developed into a delayed seasonal dip in price. However, even though this seems to be a new pattern, no one wants to wait and then be caught short on supply. 

I recommend risk management strategies to be implemented to protect a floor price and hopefully cost of production as prices rise in case the pattern of the past three years repeats itself again. As prices rise, defend cash positions with option strategies or Dairy Revenue Protection insurance in order to maintain those gains.