Will Milk Prices Move Lower?
It appears traders are throwing in the towel in the milk market. Many Class III futures contracts enjoyed a substantial price rally late last year and held fairly steady for approximately a month. There was much anticipation lower milk production in many countries would set the stage for a significant increase of export business for the U.S. Exceptionally strong domestic demand also underpinned the market. Exports during the last quarter of 2016 did show signs of improvement leading to the idea of steady to higher milk prices as product moved overseas. Numerous analysts indicated the average mailbox price for 2017 to be $1.80-$2.00 higher than 2016 with most of this anticipation stemming solely from the estimate for stronger exports. These estimates have been a detriment for dairy farmers in implementing risk management. I do not know how many times I have heard that prices are going to be better which resulted in the decision to do nothing to protect farm income. I am going to be frank and say that this has been a bad decision. I have been promoting the use of put options and put option spreads for a few months for the purpose of protecting a floor. A few have indicated in our conversations that they cannot afford to go through a repeat of last year. These option strategies were and are a no-brainer.
I do not want you to feel that I am antagonistic here, but over my 21 year of being a commodity broker specializing in the dairy industry, I have seen and experienced many things. However, lest you feel that you have missed the opportunity to market, that is far from the truth. Yes, futures prices have declined substantially over the past two weeks, but I feel there still is more downside potential in this market.
Last year, there was a substantial amount of milk dumped in the Northeast and Michigan. There has been limited addition of milk processing capacity added since then lending to the ideas that greater volumes of milk could be dumped this year due to increased milk production. The latest milk production report for the month of January showed U.S. milk production 2.5% above a year ago with an increase of 56,000 more cows. Milk production in 2016 was up 1.8%. We may be on track to exceed that average this year. Of course it is very early in the year, but milk output began the year strong.
Feed prices are expected to be reasonable based on current market outlook. USDA estimates 88 million acres of soybeans to be planted this year, an increase of 4.6 million acres. Corn acres are estimated at 90 million, a decline of 4 million. Average prices are estimated to be similar to this year averaging $9.60 for soybeans and $3.50 for corn. Soybean ending stocks are estimated to be the same as this year with corn declining slightly. Obviously, weather can change all this either way.
Exports of dairy products have been increasing for a few months indicating the possibility of stronger export demand this year. That certainly would go a long way in supporting dairy prices. The reality is that even though exports have been improving, domestic inventory has been growing. That indicates demand has not been keeping pace with production and that may be a problem through the first half of this year.
We may see stronger milk prices during the second half of the year, but from what level will we see those prices strengthening from. If milk prices decline another $1.50 from here, it will take longer to get back up to where we had been. The lower milk prices move to during the first half of the year, the higher prices will need to be to achieve a good average milk price. We certainly have a better start to the year compared to last year when Class III milk prices ranged from $12.70 to $13.80. So there is a good chance we will see a better average price.
Never, feel that you have missed the opportunity to do anything. Markets always move and opportunities always exist at various times. That is why it is important to have a plan.