Fundamentals To Cap Milk Prices
Look out below! At least that is what it seems is the cry taking place in the cheese market. Over the past two weeks, block cheese price has declined 19 cents falling to the lowest level since June 2, 2016. The results have been substantially lower Class III futures. In fact, there are no futures contracts above $17.00 over the next two years. It was not very long ago that there were many contracts trading well above that level and not very far from $18.00. That is in the past and it may be difficult for futures contracts to move back to that level as long as current fundamentals continue.
Milk production continues to increase with some plants indicating that milk receipts are at levels generally experienced during the month of May. Last year there were significant volumes of milk dumped in the Northeast due to heavy supplies and no where to go with it. Northeast Federal Order No. 1 recently submitted a request to temporarily dispose of surplus milk during the period from March 1 to May 31. This stands to reason due to higher milk output over last year and little change in manufacturing and processing capacity since that time.
What this means for milk prices is anyone’s guess. Last year, Class III milk price fell to $12.76 for May and then quickly climbed. Class IV price fell to $12.68 in April and then increased, but not as rapidly as Class III. Can we fall to that level again? It is possible, but I do not think it will move that low. After all, we started out the year with much better prices that last year. Class III prices average $16.83 for the first two months this year compared to an average of $13.55 last year. This $3.28 better and provides the hope milk prices will not mirror prices of last year. The market would really need to wash out over the next few months if this were to happen. USDA still estimates an average Class III milk price better than last year by $2.03 per cwt according to the latest World Supply and Demand report. They estimate the All-milk price to average $18.10 compared to $16.24 last year. This certainly is positive, but the current trend of cheese prices and futures prices does make us feel all warm and fuzzy after seeing milk futures fall substantially since mid-January.
There are three things that will need to take place in order to support milk prices and move them back up to prices they had been early this year or higher. One is weather which could have the next real impact. Hot and humid weather will probably not be a factor for another few months but could affect cow comfort, milk output, and timely breeding which would have a longer-term impact. Another would be a significant increase in demand that would both utilize current production as well as inventoried product. This would be the preferred method as it would support milk prices through improving consumer demand both domestically and internationally. Another would be low milk prices for an extended period of time. The reason I say extended is due to the fact that we had low milk prices during the first half of 2016 with May price falling back to a price last seen in 2009, but it did not slow milk production. Yes, there were many reports of farms going out of business, but cow numbers continued to increase nationwide keeping milk production above the previous year. Milk prices were not low enough, long enough to curtail milk output.
USDA and some analysts are providing hope of a better year and certainly the first two months have been significantly better than last year. But we certainly cannot be complacent over farm income during the rest of this year. Those who have followed my recommendations over the past few months are breathing a lot easier. Those who have not done much risk management should not feel that they have missed the boat. There may be more downside price risk and options strategies should be implemented.