July 1, 2019

History Can Provide Guidance With Milk Price Direction

 |  By: Robin Schmahl

Class III milk futures have been on a steady trend higher for the past month setting new contract highs. The overall trend has been up since March. 

Spot cheese has been increasing as buyers have been moderately aggressive purchasing as needed and in anticipation of upcoming demand. There is also concern over a tightening milk supply as the year progresses. Cheese has been the bright spot of the export market and one of three categories showing year-to-date growth over last year. The other two categories are milk protein concentrate and milk/cream as evidenced by the monthly cold storage reports. 

American cheese inventory in May is lower than in January which is very unusual and has shown very little change over the past three months. The last time this took place was in 2011. In that year, the average Class III price was $18.25 with a high of $21.67 and a low of $13.48. So far this year, we have seen a low of $13.89 and we are seeing the potential for Class III futures to reach $18.00 soon. There are many other factors involved in price movement, but comparisons can be beneficial and can provide some indication as to potential. 

The anchor we have on Class III price is the weakness of dry whey. Exports of dry whey continue to suffer which is backing up supply into the domestic market. Whey exports to China have been suffering severely with shipments to China in April down 70% from the pace a year ago and the lowest monthly volume in almost 9 years. Even with a settlement of export tariffs, it will take some time to bring exports back up to the pace it had been a year ago before tariffs on Chinese products were initiated.

The other aspect beside tariffs is the fact that dry whey demand is down in China due to the devastating impact of African swine fever. This will take a long time to rebuild and the aspect of whey exports to the country will not rebound quickly. We can be thankful increased tariffs were not put on Chinese goods and the meeting between President Trump and President Xi Jinping during the G20 meeting opened the door for the restart of trade talks picking up where they left off. 

The industry is concerned over milk supply later this year as increasing milk prices have not reduced the number of dairy farms going out of business. Overall milk supply will continue to tighten, not only from less production, but also from the challenges of good quality forages this year.