unkown markets
December 5, 2016

Is the Current Market Reflecting Fundamentals?

 |  By: Robin Schmahl

The past few weeks have been a wild ride for dairy markets. It looked as if the highs had been established about two weeks ago only to have milk futures surge to new highs all the way through the end of 2017. It seems as if strong demand is not going to slow keeping prices high in the attempt to balance supply with demand. This has improved the price outlook for next year with Class III futures slightly below $17.00 for the first half of the year and over $17.00 for the second half.

There was substantial volatility during the second half of last week with short-covering being a substantial portion of that volatility. That is always the case when futures jump and then fall back quickly unable to hold those gains. Of course, that does not mean that prices will not go back to those levels, but that type of market movement is generated by panic trading. It was also seen by the fact that block cheese price declined 5 cents last week and 5 cents during the holiday shortened week of Thanksgiving. During the same two-week period, barrel cheese price has fallen 13.50 cents with both categories of cheese down 15 cents by the close of spot trading on Monday, December 5.  However, milk futures have risen from 40-50 cents despite these declines. A bullish attitude has gripped that market in anticipation of strengthening product prices as time progresses.

Many other countries have seen a contraction of milk production due to a prolonged period of low dairy prices resulting in strong Global Dairy Trade auction prices. This improves the potential for increased exports as time moves forward. Increased exports would support dairy prices. Strong exports were partly responsible for record milk prices in 2014. That is in the back of many minds as again another possibility.

Even with record milk prices in 2014 and strong exports, domestic inventory of cheese continued to increase. Milk production was strong allowing for needs to be met as well as some left over. We have seen this pattern continue in 2015 and 2016 and that may also be the case in 2017 if the current trend continues. Demand is increasing so we need greater inventory to meet that demand, but it is something to be aware of as the calendar moves into 2017.

Grade A nonfat dry milk price has been moving within a 13 cent range since the middle of the year. Supply has been sufficient for domestic demand as well as strong exports. Last week saw price moving steadily higher finally closing above $1.00 for the first time since October 8, 2015. This is providing support to Class IV milk prices. It is one aspect of the complex that is providing support although not quite as prominent as cheese and butter.

There is a wild card currently on the table and that is the issue of the relationship of the new administration with China. There have been a few recent incidents recently that have called this into question and the outworking of this will be watched closely. It is possible that there could be a substantial impact on agricultural export business in the future depending on how this turn out. If it is negative, prices could suffer significantly. We certainly hope that will not be the case and trade will continue keeping demand for U.S. dairy products moving to that country.