How Much Better Will Milk Prices Be in 2017?
There have been numerous articles discussing the potential for milk prices this year. Strong domestic demand and the potential for steadily improving exports has the All-milk price averaging milk as much as $2.00 above the average for 2016. It is difficult to know whether this consensus is being reached by the crunching of numbers, historical comparisons, stronger demand than expected for this time of year, and the potential for increasing exports due to lower milk production in some countries or if this estimate is just being passed on from one writer to the next as it just makes sense. Everyone wants to be a part of positive news and passing it on, similar to the game of telephone, is one way to do it. Don’t get me wrong, good news is always great to pass on. However, when it comes to commodity markets and pricing, we always need to exercise caution.
Exports have been cited as an area of which is expected to grow this year. The volume of dairy products exported during 2016 increased 3% from 2015 reaching 1.89 billion metric tons. This was not a large amount, but certainly looking better than it had been. Global Dairy Trade auction prices have been improving setting the stage for better international demand for U.S dairy products.
A possible renegotiation of the North American Free Trade agreement is in the works which could be a good thing or a bad thing. Some U.S dairy lobbying groups have been insisting Canada’s protectionist policies have been blocking trade growth to Canada and are urging renegotiation of NAFTA. Interestingly, Statistics Canada records U.S. is the number one exporter of dairy products to Canada. Exports of dairy products to the country rose 54% during the period from 2012 to 2015 (2016 statistics have not yet been released) indicating the so called “protectionist policy” seems to have had a limited impact.
There are many events and outside influences that can swing market prices substantially during the course of a year. Milk prices ended 2016 at the highest level in two years setting the stage for a bright outlook for 2017. January Class III milk price was announced at $16.77 which was $3.05 higher than a year ago. Class IV price was $2.88 higher at $16.19. The February contract is virtually priced already with futures beginning to flat-line and affected very little by underlying cash price movement. Most of the price movement will stem from the weekly Agricultural Market Service weekly prices announced on Wednesdays. February prices will also be substantially above year earlier levels. Current futures contracts through the rest of the year look very promising as well. On the latest World Agricultural Supply and Demand report, USDA estimated the average All-milk price at $18.05, $1.81 higher than 2016. The general consensus of some analysts and USDA is that milk prices will be significantly better than last year. The futures market is a bit friendlier to milk prices than the USDA. The current Class III average price for the year is $17.37. This would certainly be an improvement over last year while the USDA is estimating a price of $16.80.
We must not get caught up in what these estimates indicate and miss out on protecting a floor price for milk. It should be an easy decision to utilize put options or put option spreads to protect downside while leaving the upside open to take a higher price. The desire would be to have these options expire worthless which would mean the milk price is higher. If equity increases in you account and your account value increased from your option positions, it means milk price has declined. If 100% of your milk production is protected, then this hedge has certainly done its job and protected income. If you have only a portion of you milk hedged with put options and they gain value in your account, then it is not a good thing as the entire value of your milk is declining. Even though there is potential for better milk prices this year, managing your income should always be in focus.