Dairy Markets See Strong Start to the Year
In my previous article at the end of December entitled “Will Extreme Volatility Continue?”, I discussed the volatility that might be experienced in 2021. That was a bit of an understatement as extreme volatility erupted already during the first week of the year. For example, February Class III futures moved from a low of $16.99 and January 4th to a high of $19.88 on January 7th for a total price swing of $2.89. There are still 51 weeks of the year yet to go.
The announcement of the fifth round of the Farmers-to-Families Food Box program was responsible for much of the volatility already this year. Cheese price did move higher as buyers turned more aggressive. However, a large part of the volatility was due to traders looking back to the impact these Food Box programs had on the market. Traders were quick to liquidate sold futures contracts as well as purchase contracts aggressively in order to establish long positions as quickly as possible in the anticipation of much higher prices. Most of this strong price activity has been confined to the first half of the year with limited impact during the second half. Under the new government administration, there is question whether the Food Box program will continue after April. There will be the need for food distribution after that time, but whether it will continue in this manner or a different venue is difficult to predict. Nevertheless, traders will remain optimistic for a period of time as the memories of last year remain fresh on their minds.
Last year was the most volatile on record for milk prices. The average Class III price was $18.16 and was the highest average since 2014 when it was $22.32. Even though the Class III average was $4.16 higher than it was in 2020, the volatility of 2014 was about half of what we have seen in 2020. In 2014, the spread between the lowest and highest Class III price was $6.78. In 2020, the spread between the lowest and highest prices was $12.40 and a record price swing. Class IV had an average price of $13.49 in 2020 and the lowest average price since 2009 when it was $10.89. The price spread between the lowest and highest Class IV price last year was $5.98. This was the widest spread since 2014 when it was $7.19. But 2014 was not the most volatile on record. That record was set in 2008 with a price spread of $10.70 which was followed by 2007 when the price spread from low to high was $9.34.
It certainly appears that Class IV futures may not be as volatile as last year. Butter is showing little for the market to get excited about. Butter will be a recipient of stronger demand due to the Food Box program, but with large supplies, this demand will be easily met. Churning activity shows no sign of slowing down as cream supply is plentiful. This may keep as unusually wide spread between butter and cheese again which will mean some possible large negative PPD’s again for a period of time.
The markets are less than two weeks into 2021 and already there has been substantial price movement. Much more will transpire as the year progresses.
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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