November 6, 2017

Will 2018 be a 3-Year Cycle of Higher Prices?

 |  By: Robin Schmahl

It appeared Class III milk futures moved out of their downtrend recently into a sideways to possible higher trading pattern. However, that was again short-lived with the last half of last week showing otherwise. At times the market looks promising only to have underlying fundamentals bring the market back to reality. That reality is not that demand is increasing and prices have been low enough, long enough that higher prices should result and that milk prices remaining at lower levels will put more dairy farms out of business. There is truth to all of that, but these items are not impacting the industry as much as predicted by some.

Yes, demand is improving and inventory is declining, but not at a rapid enough pace to tighten supply. Stocks of cheese continue to remain above a year ago and are on track to end this year at higher levels than last year. Yes, prices seem to have been low enough, long enough that demand should increase due to attractive prices, but that has not been the case as supply is readily available through production and inventory. Yes, lower prices will put some farms out of business, but cow numbers as substantially higher than last year and are the highest they have been since the first quarter of 1996. This does not give the indication that lower prices have impacted the industry enough to result in prices cycling higher.

This brings out the aspect of a three-year cycle that is being talked about. Some believe 2018 will have a price upswing following a historical three-year pattern give or take a bit. Even though anything is possible due to influences on the market, buyers of cheese and butter or traders will not necessarily purchase supply or futures contracts creating an upswing of the market because of historical cycles. Changes in fundamentals are what dictates price trends. Reality shows current fundamentals do not support a substantial rise of milk prices supporting a three-year cycle.

There has been much discussion as to the low level of milk prices, but in reality milk prices are better than last year. Class III price has been narrowing the gap, but still remains 76 cents per cwt better while Class IV price is running $1.79 better over the first ten months of the year. So the question is whether this year might have been considered a cycle of better prices or not. History has shown a cycle has resulted in substantially higher prices after a period of low prices leaving this year as a price cycle much to be desired. Current futures prices next year do not show anything to get excited about.

Butter is the more bullish of the complex, but continues to struggle to find support. Demand is improving both domestically and internationally, but it has not been enough to change the trend. Supply of butter is tight in The EU with prices substantially higher. However, that may have run its course. Not in the sense that price will fall out of bead, but butter prices have declined for the third consecutive reporting period with the decline being referred to as unusually rapid. France has been in the news with pictures of empty store shelves of butter. However, this is primarily for higher quality, locally produced, French butter. Many consumers have little interest in butter manufactured outside of France. However, butter is available outside of the country and will most likely be purchased when push comes to shove. Although export demand is improving with butterfat exports up 9 percent for the first nine months of this year, September butterfat exports were 16 percent lower than a year ago.

The indications are that milk prices may not swing significantly higher next year unless aided by weather or a substantial increase of demand.  Do not be complacent in the anticipation of higher milk prices next year that you go out and overspend now with the idea of better milk prices to come. Remain cautiously optimistic.