December 17, 2018

Is There A Seasonality to End of the Year Prices?

 |  By: Robin Schmahl

Prices many times follow seasonal patterns due to various influences such as supply and demand, time of year, seasonal buying, and weather. There are also other influences that can change the seasonal swings such as heavy inventory, world prices, and political events. 

I have been asked the question numerous times about the seasonality of the dairy markets during the second half of December. There are various ideas as to market direction and duration. Those looking to initiate Dairy Revenue Protection coverage for the second, third, or fourth quarters would like to take advantage of higher prices if they were to develop. The ability to write first quarter endorsements is closed and I assume RMA will begin listing prices for the first quarter of 2020 of which they have not done so far through December 15th. There are also those who would like to protect milk prices using options for the nearby months. 

The pattern of price movement that has been established has been declining milk futures until prices bounce for the period of a few days or a week. However, prices again fall back making new contract lows due to the inability of spot prices to provide sustained support. Recently we have experienced the same pattern as futures bounced from new lows due to spot cheese and butter prices rebounding from multi-month or multi-year lows.

So what has been the historical pattern through the end of the year beginning of the next? I looked back at Class III futures and cash cheese prices during the last half of December and the first half of January to see if there has been a pattern that could possibly be used as a guide. Daily charts were used as a guide to price movement. During the period from December 2011 through January 2018, there have been six years during which Class III futures increased during the last half of December with only 2017 posting a decline. The first half of January was not as conclusive as a comparison. During those seven years, there were 4 years during which futures increased and three years during which they decreased.  

As far as cheese price movement was concerned, it was a mixed bag. There has been the idea that cheese prices increased through the end of the year as those companies with inventory wanted to move prices higher in order to increase the value of their inventory by the end of the calendar year if that is what they used for accounting. However, as analysis of the last half of December shows cheese prices increased three years, decreased two years, and moved sideways two years. The first half of January showed an increase three years, a decrease two years, sideways one year, and volatile up and down one year. There were three years during which milk futures increased while the cheese prices declined or moved sideways. There were three years during which futures declined while cheese prices increased or moved sideways.

The bottom line is that the probability of Class III futures increasing during the second half of December is high. But as with all marketing, we must not stake the farm on a seasonal trend and need to take advantage of a bounce in prices during the current marketing environment.