July 5, 2017

Milk Prices Are Exceeding Expectations

 |  By: Robin Schmahl

It may not feel like it in many ways, but milk prices this year are well above a year ago. With the announcement of the Federal Order class prices for June, the average Class I price for the first six months of the year is $2.27 above the same period last year. The average Class II price is $1.94 for the same period which is nearly the same as the Class IV price average of $1.91 higher. Class III has had the greatest increase with an average price of $2.64 above the first six months of 2016. The All-milk price for May according to the recently released Agricultural Prices report is $2.20 per cwt above a year ago. Predictions had been made at the beginning of the year that milk prices could average as much as $2.00 more than last year and that prediction seems to be conservative according to the first half of the year results.

This is certainly promising given the fact that milk production is above year earlier levels, cow numbers are higher, and cheese inventory continues to set records on a monthly basis. Growth in demand continues to be experienced in many dairy products with the exception of fluid milk products. April packaged fluid milk sales were 6.1 percent below the previous year with the largest declines taking place in the categories of Low Fat and Fat-Free Skim milk. Fluid milk consumption does have a tendency to decline during the summer months, but this decline is the largest seem for quite some time. This decline is offset by rising demand for other dairy products keeping milk prices supported. Higher inventory of dairy products has not been a concern due to the potential for increasing demand both domestically and internationally over the second half of the year.

Recent price movements have had many scratching their heads. Weakening cheese prices are moving against seasonal tendencies. Spring flush usually brings lower prices which provide the opportunity for buyers to step in and purchase supplies for upcoming demand. This results in buying interest that generally causes cheese prices to increase. However, the market is giving the indication that prices may move contra seasonally for a period of time. This may be due to buyers gaining ownership of greater supply earlier this year allowing them to hold back and wait for lower prices before stepping back in again. It also seems to be tied to increasing storage rates due to limited storage availability. It would not seem this would have a significant impact on buyers looking ahead to second half demand and the potential for increasing exports, but that all depends on how much ownership they already have.

It is always an interesting market and one that keeps us on our toes. Even though spot trading has now migrated to the electronic platform, there is no reason to think volatility will decrease. In fact, it may likely increase as floor traders can only watch a screen in the pit and not see who is buying and selling on the floor during spot trading. The move of block and barrel cheese to the electronic platform on June 26 was the end of an era and has gone the way of all of the other markets.

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