unkown markets
November 21, 2016

Will the Year End With Strong Milk Prices?

 |  By: Robin Schmahl

Milk prices certainly look a whole lot better for the end of the year than they looked just one month ago. Cheese prices have moved contra seasonally and could result in Class III milk prices that that could be the highest of the year if it holds. The December contract is still wide open for impact from the underlying cash as it is just beginning to be priced as far as the trade is concerned. Cheese prices will need to hold near this level for the next month for this to become a reality. If cheese prices decline, Class III contracts will follow. The question is, “Can these prices hold through the next month?”

USDA’s Dairy Market News publication reported “some Midwest manufactures report signs of the holiday cheese pipeline filling.” Time of year would be right for much of the holiday demand to be nearly satisfied, but as long as fresh cheese demand is strong and supply tight, block cheese price will remain high. Cheese production is expected to increase over Thanksgiving as more milk will be available for manufacturing. This certainly will not overwhelm the market and increased milk supply will be welcomed by many plants.

Not only is domestic demand good, but there may be increased interest from the international market due to lower milk production in other countries and well as a steady rise in world prices. The latest Global Dairy Trade auction increased 4.5% moving it to the highest trade weighted average since July 2014. Butter price on the auction reached $1.90/lb with cheese reaching $1.68/lb. Although these prices are better than they had been, domestic prices still remain higher and on top of that we have a very high U.S. Dollar which makes it more expensive. However, a high currency may not mean much of world supply tightens and buyers step up to purchase at whatever price they can get it.

The U.S. certainly has a plentiful cheese supply that can be used to fill market voids if the product is right to meet the needs of the buyers.

Strong milk production will insure sufficient supply for those who want it. Spot milk has been somewhat difficult to find by those plants that desired to keep operations running on full schedules. That may begin to change soon as milk production remains strong and high demand for the holidays eventually declines. The latest milk production report for October showed U.S. milk production up 2.5% from a year ago. This is the highest percentage gain of milk production so far this year on a monthly basis once the adjustment is made for leap day. Milk production is increasing and prospect for higher prices through the end of the year and next year will keep production strong. However, even if cash prices and milk price decline early next year, it likely will not make any difference as far as milk production is concerned. There was very little, if any slowing earlier this year when milk prices moved back to 2009 levels for one month. Increasing prices after May improved the outlook and resolve of dairy farmers to keep barns full and production strong. The only way we may see a contraction of milk production is to have an extended duration of low milk prices and we certainly do not want to see that happen. If only world prices continue to increase and international buyers come to our shores looking for dairy products can we breathe a sigh of relief otherwise, we may possibly see a dip in milk prices before a long-term trend of higher prices is realized. That dip is one you will want to avoid using a flexible marketing strategy.