Volatility is Back: Trade and Weather Create Milk Price Uncertainties

Analysts predict milk prices will average in the low $16 range for the remainder of 2018, but trade uncertainty and the global supply and demand balance will add volatility into the marketplace.

“If you look at the volatility curve over the past few years, we’ve kind of squeezed it down,” says Mike North, president of Commodity Risk Management. “I think there is room for it to come back. There’s a lot of chatter about possibilities on the world market, but with every opportunity there’s also a threat.”

Robust Exports

U.S. export volumes set records in March and April and reached 18.8% of overall milk production. But uncertainty around the North American Free Trade Agreement, trade relations with China and the European Union’s (EU) push to sign trade agreements will have an impact on whether those export numbers remain robust.

“The EU is out pounding on doors trying to get as much done on the agreement side as they possibly can before the U.S. seems ready to even engage,” North says. “There seems to be either hesitation or indifference about getting these trade deals done and that has kept us from taking advantage of opportunities with key partners.”

According to North, what happens with trade could take prices into the $17 range “but that could melt back to low $15 prices pretty quick, too.”

Mother Nature

Weather will have an impact on where prices head as well, as we enter into the heart of hot summer weather. Nate Donnay, director of dairy market insight with INTL FCStone, predicts a $16.01 Class III price from July through December 2018, but that price hinges on the balance of global supply and demand, which will be affected by weather patterns.

“We’re obviously headed into the summer heat in the Northern Hemisphere, which will tighten the supply side a bit,” he says. “Toss in heat in Australia, environmental constraints and the Mycoplasma bovis cull in New Zealand and the supply side isn’t overly bearish.”

On the demand side, Donnay says global import growth will be slowing in the coming months.

“Global milk equivalent imports are up 8.1% year to date, and that is unsustainable,” he says. “Some of the large importers have rebuilt their inventories and will back away from the market the second half of 2018. So the seasonally tighter supply is going to be matched with a cool down in demand, which should keep prices from rising too much.”

Where weather takes production and how trade impacts global demand will put milk prices on the razor’s edge.

“That $16 threshold probably becomes our average, but tip one way off the razor and you’re talking $15 milk and tip the other way and your talking $17 milk,” North says.

From a risk management perspective, North likes options that provide a solid base to protect against downward price movement but leave opportunity to take advantage of higher prices.

“No one wants to put a lid on this market, and for good reason,” North says.