milk
November 20, 2017

What Will It Take to Achieve Higher Milk Prices?

 |  By: Robin Schmahl

It certainly does not look good for milk prices for the foreseeable future. Class III futures have been in nearly a freefall since the last day of October. It is interesting that cheese prices have not followed the same pattern. Block cheese price was at $1.76 on October 31st, then fell to $1.6025 before rebounding to $1.71 and then fell back to $1.62. However, January Class III futures have fallen nearly $1.20 during this period with only a one day jump in price before resuming the downtrend. New lows have been established in all contracts.

Traders have been conditioned to disregarding any price increase as a change in trend. Price increases have been short lived before cheese prices again fell back. Cheese prices really have been in a sideways price range since mid-May with that range being about 25 cents. Yet, futures have declined substantially as closer contracts needed to converge to the underlying cash and later contracts have moved to a discounted market. Traders anticipate further price declines.

There was much emphasis put on improving exports this year which would decrease inventory and support prices. Exports of cheese have been better, but production has improved resulting in higher inventory despite better demand. The industry knew cheese stocks were growing with total cheese stocks continuing to set new record inventory on a monthly basis, but increasing population and growing demand was thought to keep pace with and/or reduce supply. Growing stocks was the handwriting on the wall that was being ignored due to the anticipation of better demand.

The other aspect is continued lower grain prices. There has always been a strong correlation between corn and milk prices. This has been the case historically, currently, and likely for the future. Some say that dairy practices have changed rendering the correlation obsolete, but all one has to do is overlay historical and current price charts and the resemblance remains. If we look back at 2014, we can see the opposite of what we see today. Milk prices set record highs following very high corn prices in 2013 and strong prices in 2014. Strong export demand was a part of high dairy prices as well, but it does show the pattern. We are now at very low corn prices and stands to reason we would see low milk prices. It appears that higher feed prices trigger heavier culling more quickly than lower milk prices if feed prices are low as well.

Right now it does not look to be a year of price cycle rebound, but we have not yet turned the calendar to a new year. Much can happen to change price trends, but there is nothing on the horizon as far as weather or crop loss is concerned to facilitate a continued trend to higher milk prices. One consolation is that milk prices have not yet fallen below the low prices of last year, but that is not much of a comfort when bills need to be paid and futures show further milk price declines. Hope trading has flown out of the window and any futures price quick rally should be taken advantage of by utilizing put options and/or put option spreads. I recommend not to use forward contracts that will lock in a price. Use options to leave the upside open to capture a higher price if it develops.

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