Will Next Year Be a Repeat of This Year?
Discussions with many dairy farmers centers on whether current prices for both cash and futures can hold through the first half of next year. The reason discussion center around that duration of time is due to some analyst expectations for higher prices later next year as world dairy prices improve. Even with the potential for better dairy prices next year, there is still much time in between during which much can happen. We did not think milk prices could drop as low as they did in May, yet they fell back to 2009 levels. We did not think record prices would be established in 2014 during the time when world prices were declining.
It is possible improving world prices could have a delayed impact on U.S. prices as most dairy commodities are being booked months in advance. Business is done where the best prices can be achieved. Low world prices are not just being watched by purchasers of dairy products, but are being taken advantage of. Contracts are being made as far out as possible if prices are reasonable. This could result in world prices moving higher allowing the U.S. to become more competitive in some products without seeing a surge in international demand as buyers have no need to be aggressive. Once world prices move up to or exceed U.S. prices, buyers will continue to look for the best deal based on price and the currency exchange rate. This could result in a lag time much as it did in 2014 when U.S. prices remained high while dairy prices in other areas of the world were falling.
Even though there is a general consensus that current milk prices may not hold and lower prices may again unfold over the next 6-9 months, there remains reluctance to protect current milk prices. There is the concern of declining prices and the fear of a repeat of what took place during the first half of this year, yet there still is hope it will not follow a similar pattern. Everyone I talk with about this potential indicates that they do not want to or cannot go through a few months of low milk prices like that again.
Low milk prices during the first half of this year did not slow milk production. It did not increase culling resulting in reduced cow numbers. Inventory levels of cheese and butter continued to increase resulting in record cheese inventories. This is not setting a pattern for improving milk prices. If the market did not due its job of curtailing milk production earlier this year in order to tighten supplies, it may very well need to do it again. That is what we might expect to see next year. Let’s be clear, I am not making a prediction of this, but pointing out there is strong possibility of a similar pattern. Cheese inventory cannot continue to increase without some repercussion in the market place. The last time cheese stocks were this high the government initiated the “Whole Herd Buyout” which eliminated cows resulting in a substantial reduction of cheese inventory. The government is not interested in doing such a program again.
The bottom line is that demand will need to improve both domestically and internationally in order to reduce supply or milk production will need to decline tightening supply. The way to lower milk production is to lower milk prices long enough to result in lower output. That is the concern and what needs to be avoided. The Margin Protection Program or LGM-dairy will not protect your milk price. They protect income over feed. Milk prices can decline and so can feed prices resulting in little or no benefit. Now is the time to implement the put option spreads I have recommended in the past two articles if you have not already done so. These can and should be used in conjunction with these programs to protect milk income. I can help you with this, so feel free to contact me and we can work on implementing strategies to protect income. Do not leave your business at risk of the potential repeat of milk prices similar to what we experienced earlier this year.
- August Milk Production report on September 19
- October Federal Order Class I price on September 21
- August Livestock Slaughter report on September 22
- August Cold Storage report on September 23
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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