Bulls dominate milk market

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Milk futures in Chicago reached a two-year high today and butter hovered around the highest levels in at least five years, as booming exports and year-end holiday demand fueled a bull market across the dairy complex.

Cheese-makers and other commercial users have stepped up buying recently, trying to lock in supplies into next year, traders and analysts said. While domestic milk production is increasing, Japan, Mexico and other foreign buyers are gobbling up U.S. dairy products at a record pace.

That’s driving a general urgency to secure supplies before prices go any higher, traders say.

“It looks like everybody decided to get coverage for 2011,” a trader in Chicago-based CME Group’s dairy complex said today. He expects milk prices to climb further in coming weeks.

At today’s close, Class III milk futures for delivery this month were unchanged at $16.88 per hundred pounds, after earlier rising to $16.90, the highest price for a closest-to-expiration contract since $17.03 in October 2008. The Class III contract reflects milk used to make cheese.

Cash-settled butter futures for October delivery fell 0.425 cent to $2.19575 a pound. Yesterday, butter settled at $2.20, the highest price since the contract started trading at CME in September 2005.

Milk futures are up almost 19 percent this year and continued rallying this month even as the government reported rising production and supplies.

U.S. milk production in September rose 3.3 percent from a year earlier, to 15.52 billion pounds, the U.S. Department of Agriculture said in an Oct. 19 report. That marked the seventh consecutive monthly increase. Production for the full year is projected to rise 1.8 percent to a record 192.8 billion pounds, the USDA forecast previously.

The milk market’s recent gains in the face of bearish underscores well-entrenched bullish sentiment, analysts say.

“You’ve absorbed some bearish information the past couple of weeks… and it hasn’t broken (lower),” says Dave Kurzawksi, a broker with Downes-O’Neill/FCStone in Chicago. 

“Demand has been very strong all year,” he adds. “We’re in a period of growth for exports. I don’t see any reason for that to drop off right away.”

For the year through August, the U.S. exported $2.37 billion worth of cheese, whey and other products, up 67 percent from the same period in 2009, according to the U.S. Dairy Export Council. Cheese shipments during August surged 95 percent as Japan, Mexico and South Korea bought more, the group said.

Dairy prices have also climbed at supermarkets, and likely will continue rising next year, according to government projections.

Grade AA butter averaged $3.57 a pound at the retail level during September, up 27 percent from a year earlier and the highest monthly price, not adjusted for inflation, since November 2004, according to the U.S. Bureau of Labor Statistics.

Retail dairy products prices are expected to increase 4.5 percent to 5.5 percent next year, the largest estimated rise among all food categories, the USDA said earlier this week. The Consumer Price Index for all food is projected to rise 2 percent to 3 percent.

Milk’s rally comes amid surges in other farm products, including grains, livestock and cotton, and partly reflects heightened speculator buying across many commodity classes, analysts say.

The 19 percent gain in milk futures this year lags that of corn and wheat, up 37 percent and 29 percent, respectively. Cotton futures are up 63 percent.

“Milk is one of the cheapest commodities lately,” Kurzawksi says, meaning some investors expect the price to rise further to catch up with gains in other markets.

While stronger milk prices restored the dairy industry’s profit earlier this year after a money-losing 2009, producers still face plenty of risks, analysts say. Among the biggest concerns is a surge in feed costs, after corn soared to two-year highs above $5 a bushel last month.

Additionally, milk prices are expected to drop near $14 per hundredweight early next year, based on CME futures.

Producers should consider locking in a floor price for their milk through put options, Kurzawksi says, but still try to be in position to capitalize on any additional market strength in 2011.

“I’d leave as much room to the upside next year,” Kurzawksi says.


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