MADISON, Wis. ― About 35 people crowded into an outdoor tent last Friday to get an idea where milk prices may be heading.

They may have been disappointed when the speaker didn’t predict an exact price, instead giving a possible range of $14 to $22.

But the speaker had a point: There is uncertainty ahead and dairy producers need to be ready for every eventuality.

There was an additional note:

“We don’t know where prices are going, but we really believe something big is coming,” Matt Mattke, commodity consultant with Stewart-Peterson, told those attending the seminar.

Things have been fairly quiet the past year, he said. Milk prices and feed prices have generally been moving sideways, with no big push to the upside or downside.

Some indicators in the dairy sector, such as higher milk production, have been bearish for prices, while others, such as exports, have been bullish. So, when a person looks at the fundamentals, Mattke said, it’s been a “real mixed bag.”

Yet, the fundamentals could change as a result of changes in U.S. monetary policy, the strength of the U.S. dollar abroad and other factors, Mattke pointed out.

This started to send off alarm bells in my mind.

  • I have always felt that the Federal Reserve Board’s quantitative easing (or cheap money) policy is a mistake. It doesn’t make sense to distort the markets with this kind of policy. Sooner or later, the government will have to wean the markets off and there could be problems, including a huge drop in the stock market. The economy ― and consumer purchasing power ― will take a hit. 
  • If interest rates really take off -- after slowing rising for much of this year -- the U.S. dollar could gain strength against other currencies abroad, which could hurt dairy exports.
  • We can’t afford another drop in exports, like the drop that occurred in 2009. Reduced exports that year, along with the global recession, caused milk prices to plummet.

Again, these are my ideas, not the ideas or suggestions I heard at the Stewart-Peterson seminar, although U.S. monetary policy was one of the uncertainties cited at the event.

I agree with Stewart-Peterson that things will change, and the change could be rather dramatic. Many dairy commodities, such as Class III milk futures and whey, have been range-bound (or trading within a narrow price window) since the early part of this year. And the longer commodities stay in a range, the more volatile they can be when they break out.

“Big swings are possible once we move out of the range,” Mattke said.

No one knows if the break will be to the upside or downside, so it’s good to be prepared either way by hedging your position in the market.