May 8, 2017

How Long Will Strong Milk Prices Last?

 |  By: Robin Schmahl

Dairy prices have been holding well in the face of strong milk production and growing inventory. This certainly is positive as it holds out the hope that demand will increase and spring flush volumes will be absorbed without a serious decline of prices.

After the release of the April Federal Order class prices, the Class III price average is $2.45 better than last year for the first four months of this year. The Average Class IV prices is $1.90 better. Last year, Class III price bottomed in May at $12.76 while May futures currently indicate price near the $15.50 level, which would be wonderful.

May futures could go higher or lower depending on what happens over the next two weeks. After that, the May contract will virtually flat-line with only minor adjustments based on the weekly AMS prices. Seasonality and history would suggest prices will increase from May or June indicating the worst may be behind us according to some analysts.

Strong World Markets

Good things are taking place. World prices are increasing as shown on the Global Dairy Trade auctions. U.S. prices are competitive with world prices opening the door for greater export demand. March exports of dairy products showed gains in all categories except butterfat. Butter fat exports are floundering with March exports down 59 percent and exports for the first quarter of this year down 49 percent compared to last year. The slower pace of butterfat exports have not been a concern for the market. Buyer interest remains sufficiently strong in order to keep price above $2.00. Any dip in price that moves lower is viewed as a buying opportunity.

Cheese exports are improving with March exports up 22 percent and year-to-date exports running 12 percent ahead of the same period last year. This will be key to milk prices. Demand needs to absorb increasing output and heavy supplies. So far, the market is doing a good job of that. Although cheese exports are strong, volumes continue to run below the levels seen in 2014 and 2015.

Plants at capacity

There has been a report of milk being dumped in the Northeast Federal Order #1, but the extent of the dumping has not been released. In March, Federal Order #1 made a request and was granted the permission to dump milk from March 1 through May 31, but there had been no evidence of it to date. Last year, a substantial amount of milk was dumped due to the inability to handle or haul it.

The price of extra milk for sale in the Midwest is being lowered with the latest price range of $3.00-$6.00 below class.  Lower prices has prompted some plants that had room to step up and purchase at these attractive prices. It will be only a few weeks before more milk will be on the market for manufacturing as schools, college, and universities will be closed for the summer. How much impact this will have on milk handling is unclear. This could increase the dumping of more milk if some dumping is already taking place while schools are still in session.

One thing for certain is that milk production will continue to increase as long as milk prices remain at profitable levels. The only thing that would slow it down would be weather that would impact cow comfort and reduce production.

September Class III futures have been able to work their way back up to $17.00 where they had not been for a month. There were numerous individuals that said they were going to hedge some of their milk if futures moved above $17.00 again. I hope these individuals will make good on this desire and carry out their plan.

There are many things that can influence prices through the rest of this year and it may not be a good idea to set the sites higher each time a predetermined price level is achieved. Hedges need to be established if they are set according to the business and its goals. Predetermined prices for hedging without implementation is not a marketing plan. It is purely speculation with the hopes of beating the market and attempting to pick the top. This approach may be beneficial sometimes, but it has not worked very well over the past 1 1/2 years with nearly every contract settling lower than it had been at times throughout the year.