There is still quite a bit of optimism for dairy prices, but one would not know it with the movement of milk futures over the past few weeks. Traders have reacted with a general frustration over the inability of spot prices to trend higher. Cheese, butter, dry whey, and nonfat dry milk prices all have been showing weakness.
It seems there are two main factors as to why this is taking place. The first factor was that buyers had been purchasing supply ahead of time early in the year as price were increasing. There was a fear of continued higher prices due to heavy culling that was taking place. Increased culling was primarily the result of high feed prices. Other costs increased was well but there is always a reaction to high feed prices. For many, that was offset last year by Dairy Margin Coverage program payments. Nevertheless, culling increased significantly toward the end of the year. the industry was concerned this was to continue prompting buyers to purchase product substantially ahead of time. The unknown was the level of milk production and supply of dairy products that would be available as the year progressed.
Some of that concern has been mitigated as cow numbers have been increasing on a month over month basis for February and March. The April Milk Production report will be released soon providing another set of number the market can digest. If cow numbers again increase from March, it may solidify the sideways to lower trading pattern as the concern over milk supply will be reduced. This does not mean that all is lost, and milk prices will continue to trend lower. However, it may indicate that the high may be established for the year. Class IV milk price set a record high in April with price expected to be lower in May. Class III price will set a record high in May.
I know the May Class III milk price has not yet been announced but current futures are trading just shy of $25.00 and will remain close to that level through the rest of the month. Once the front-month reaches the mid-point, price tends to flat-line until the last trading day with price fluctuations mainly impacted by the weekly Agricultural Marketing Services (AMS) dairy product prices report. The price is generally already anticipated by the trade as they have calculated the final price based on spot prices and the weekly product prices. To understand how they can do this, one needs to understand how pricing works for dairy products. The average of spot prices during the course of the week sets the pricing used the following week by transactions done by buyers and sellers through usual business being conducted in the country. A survey of the general business done in the country is what is recorded the follow week on the weekly AMS Dairy Products report. The AMS reports for the month are then used to determine the weekly average prices used in the monthly announced prices. This is how the trade can determine the potential milk prices generally by the middle of the month by using the average weekly average spot prices for daily trading. This is the reason there is no need to hedge front-month milk prices near the middle of the month or later. Any recommendation to the contrary should not be entertained as it is not necessary and will add an unnecessary marketing cost. Below is the expired April chart clearly showing how futures moved during the last half of the month until the contract expired, and the final price was announced.
The second main factor is inflation and how it is impacting the consumer. Prices have risen significantly is all areas of the economy. But it really hits home in the food and fuels bills. It is uncertain the level of impact that will be seen in the demand for dairy. As always, the initial change may be seen as consumers look to purchase lower priced varieties of dairy products similar to what is taking place in meat consumption as demand is moving to lower priced cuts of meat. The following phase will be to limit purchases of dairy products if inflation continues, and disposable income tightens. The most recent Global Dairy Trade auction reported the largest event over event decline of the trade weighted average price since 2015. The consensus was that global dairy prices had softened due to inflation in many parts of the world. An overall slowing of the demand for dairy both domestically and internationally could indicate price weakness in the future.
Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in trading commodity futures and options on futures. It may not be suitable for everyone. This material has been prepared by an employee or agent of JSA and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.
