June 18, 2018

Can Fundamentals Overcome Uncertainty?

 |  By: Robin Schmahl

It has been a brutal couple of weeks for Class III dairy futures. Cheese prices slowly eroding with both blocks and barrels near the bottom of the trading range required futures to eliminate a large portion of the price premium contained in the market. Futures prices have fallen back to the levels last seen in early April with prices falling faster than they had increased. This eliminated much of the optimism contained in the market.

There has been much uncertainty in the market over export tariffs. Both Mexico and Canada imposed tariffs on cheese and yogurt a short time ago which may have been one reason the market topped and futures began falling. In April, Mexico was the largest buyer of cheese increasing 11% over the previous year. Canada is a large buyer of yogurt. Anything that upsets the balance of exports could result in a back-up of supply and thus lower prices.

Over the weekend, China retaliated to U.S. tariffs on some of their products by announcing a list of their own. Earlier, some agricultural products such as soybeans, corn, wheat, cattle, and hogs, to name a few, were threatened to have tariffs implemented on them. However, that had been put on hold with no resolution and no implementation. Now, dairy products such as whole milk power and skim milk powder have been targeted with tariffs beginning July 6th.  China is a large buyer of lactose with shipments in April at a record high. Fortunately, lactose was not included on their list. Thus, three of the top four export customers of U.S. dairy products will have tariffs on some form of dairy products.

It is unclear just how much this could impact the market, but it provides greater uncertainty and likely put a lid on market recovery. Milk futures in early April were looking very promising as the idea of strong domestic demand and increasing exports was raising the optimism of the market. But politics can have as much or more impact on the market than fundamentals and such is the environment we are in now.

If milk prices fall back down to the levels of earlier this year, more farms will exit the business. This would likely tighten milk supply later this year resulting in a strong chance of higher prices next year. However, it now looks to be another tough second half of the year. However, things could change quickly if resolutions are made over current trade issues. That would change market perception quickly causing aggressive buying of futures in the anticipation of strong exports being resumed. Until then, the cloud of uncertainty will continue to overhang the market.