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April 11, 2016

Have Dairy Prices Bottomed?

 |  By: Robin Schmahl

After spending some time below $2.00, butter price has again rolled back above that level giving the impression price may have set a low. It is still early in the year, but the surprising strength is making the industry sit up and take notice. Some buyers had been holding back purchasing supply on an as needed basis believing price was going to weaken further as spring infolded. However, price remaining supported above $1.90 and now moving back above $2.00 is resurrecting the similarities of the past two years and may be causing concern for buyers. In 2014, butter price began moving higher at the beginning of the year eventually setting a record high of $3.06 in late September. In 2015, price began moving higher in July and eventually reached another record high of $3.1350 in late September. It is now fresh on buyers’ minds as to whether this is going to be a repeat of the past two years. Fundamentally, one would determine that a repeat will not be possible. However, butter price has been very resilient due to good demand with both domestic and world butter supplies adequate to meet that demand. It is possible the current price increase is the result of fear that has now gained some traction. Price moving back above $2.00 may have brought more buyers from the bench to join the game. It then becomes a bidding war with price increasing just because price is increasing. We have all been to auction and have seen or even been a part of the bidding frenzy that sometimes accompanies these events. It the end, the item that was finally purchased by the winning bid was nearly the price of a new one. I am not indicating that this is what is taking place, but the feeling in the market is such that this may be happening. We will see whether this is just a short-term bounce in a few days or weeks or just another dead cat bounce. It certainly is good to see this strength during this time of year.

Grade A nonfat dry milk has not been as fortunate with price declining below 70 cents to a level last seen August 12, 2015. If the current price of 69 cents at the close of the week of April 8 is not able to hold, price could fall to the lowest level in a long time. I have checked back as far as 1980 and have not seen a Grade A nonfat dry milk price this low. Even though nonfat dry milk/skim milk powder (NDM/SMP) is in good demand, world supply is burdensome. U.S. exports of NDM/SMP are the bright spot for dairy exports with the month of January showing the most export volume ever for that month with volume up 23%. February NDM/SMP increased 16% over the previous year with year-to-date exports up 19% compared to last year. One would think that strong demand would indicate price should be higher. However, NDM/SMP production is strong with plentiful supply. The EU recently expanded their public intervention scheme to allow for greater amounts of dairy products to be taken off the market temporarily. There is 109,000 tons of skim milk powder in government storage in the EU at present with the potential to absorb 218,000 tons of skim milk powder.

The volatility of dairy prices due to various factors certainly has been significant when looking over the past eight years with very low prices in 2009 eventually followed by record high prices in 2011 and then again in 2014. Now prices are back down to levels seen in 2010. Ideas to manage these price swings are being looked at as well as implemented in various ways. The New Zealand securities exchange recently received approval for its proposed milk futures and options contracts. The exchange already offers whole milk powder futures and options, skim milk powder futures, anhydrous milk fat futures, and butter futures. Milk futures and options are expected to be launched sometime in May.



Upcoming reports:


-World Agricultural Supply and Demand report on April 12

-March Milk Production report on April 20

-March Livestock Slaughter on April 21

-March Cold Storage report on April 22