Light at the End of the Tunnel
There may be some light at the end of the tunnel of depressed milk prices. However, the length of the tunnel is unclear, but there seems to be a ray of light indicating better dairy prices may be coming.
Dairy exports have been struggling for awhile as there has been a wide difference between U.S. prices and World prices in some categories. This has been slowly changing on both sides of the waters. Global Dairy Trade (GDT) auction prices have been on the rise as supplies have been reduced due to lower milk production in many other countries. U.S. dairy prices have declined bringing prices more in line with each other, a place where they have not been for quite some time.
Cheddar cheese price on the latest GDT auction was $1.56 per pound compared to the U.S. price of $1.54. Butter price in the GDT auction was $1.76 compared to a U.S. price of $1.82. This makes cheese more competitive and this was seen on the latest dairy export sales report. Cheese exports for the month of August totaled 22,710 metric tons and virtually the same amount sold a year ago and the first year-over-year gain since September 2014. This is a good indication of that light at the end of the tunnel. If GDT price continue to improve, it would mean greater interest may develop for U.S. cheese which would increase demand and support prices.
Unfortunately, butter exports are not following the same pattern. U.S price still remains above World price with exports continuing to suffer. The latest GDT auction showed August butter exports down 59% from a year ago and down 73% from 2014 totaling 957 metric tons. This certainly is hard to swallow and while U.S. exports are down substantially, imports are higher. This resulted in a net trade deficit of 3,743 tons and the highest deficit since December 2006. This is one reason why current butter inventory is 52% above a year ago.
So, while there is light at the end of the tunnel, it will take some time to get there without the aid of some unforeseen miracle. While it may take some time to achieve very good milk prices again, it would be nice to see acceptable milk prices at which cost of production can be achieved and profitability again seen.
There is the potential milk prices could again follow the pattern seen during the first half of this year. Increasing milk production and a growing national herd size indicate plenty of milk supply will be available through the end of the year. Strong milk production may lead to inventory ending the year at a higher level than last year. This would point to a repeat of lower prices as inventory would begin the year at a higher level. We cannot count on the export market to increase substantially in the near-term as it will take time to redevelop the demand we enjoyed 2 years ago. Domestic demand is strong and growing which certainly will go a long way to providing some price support.
While it seems there are some indications for higher milk prices, it does not rule out to potential for another dip to lower prices before a bottom is realized. Improving World prices and increasing demand may keep the low from being prolonged. No one wants to go though even a short duration of what happened earlier this year. Yet, the risk is there and farmers must take steps to minimize that risk.
- World Agricultural Supply and Demand report on October 12
- November Federal Order Class I price on October 19
- September Milk Production report on October 20
- Livestock Slaughter report on October 20
- September Cold Storage report on October 21
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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