October 23, 2017

What Will Generate Higher Milk Prices?

 |  By: Robin Schmahl

We have all been watching the market with much hope and anticipation of a seasonal price rally that is just not materializing. There have been a few glimmers of hope recently, but they have been short-lived. Each time cheese prices have rallied, traders were reluctant to buy into the rally due to an overall bearish market attitude. Each price increase has been met with buyer resistance, with the result being lower prices than the previous lows.

Recently, numerous Class III futures contracts have made new contract lows. Spot cheese prices have been at current levels before, but futures are now 40-50 cents lower as any remaining price premium is being stripped out of the futures market. It appears a pattern similar to last year will not been seen with the opposite a real possibility. Further price erosion could unfold through the end of the year. The hope now is that strong and increasing demand will be able to absorb production and keep support under the market.

So why is strong demand both domestically and internationally not able to move prices higher?

The short answer is because of supply. The overall market seems to have been turning a blind eye to record total cheese inventories on a monthly basis that we have seen for nearly two years. There has been an observation that world population is growing and higher cheese inventories are justified. That makes sense if we have a year or two during which milk production is significantly curtailed and inventory supplies demand. Then higher inventory will certainly be welcomed.

However, the justification of higher inventories due to higher population does not make any sense. A growing population would mean growing demand that should keep up with growing milk supply. These would offset each other eliminating continued growth of inventory. This would lend support to milk prices as the market would be somewhat balanced.

It seems the realization of continued growing stocks of cheese and other dairy products is moving to center stage. We know there will not be another Whole Herd Buyout that took place in the mid-1980’s and there will not be another CWT Herd Retirement program due to the lawsuit that ensued. So what is left? There could be a nationwide quota system implemented, but I wonder what consumer advocate group(s) would oppose that and initiate another lawsuit for government price fixing. The stage has already been set for that.

It seems to be up to demand or reduced milk output. My vote is for an increase of demand, but it may require a combination of these to accomplish the potential for higher milk prices. The September Milk Production report showed a production gain of 1.1%, the slowest gain this year. Both sides may be starting to move together. No farmer wants to see lower prices for the commodity they produce, but it may unfold as lower prices tend to improve demand. It is a tough situation we are in at present. Grain farmers are going through this very same thing.

Looking back historically, we have been through these downturns numerous times. The result was always better prices and even record prices at some point. This may again be a possibility, but it may take a little longer this time given the current market fundamentals. Brighter times are ahead, but the shadow may be longer than desired.