It seems as if Class III milk futures want to move higher, but the trade is hesitant to put extra premium into the contracts. Class IV futures are similar only they have not performed as well as their counterpart. There is a bit more optimism for cheese prices than for butter. One reason is that American cheese inventory has been running below a year ago so far this year except for April and June. Total cheese inventory has been lower than the previous year for January and June. Historically, cheese inventory increases during the first half of the year and then decreases during the second half of the year. This has been the pattern again this year, only inventory is running lower than a year ago providing a more supportive scenario.
Butter inventory is running somewhat different as inventory has been higher than a year ago for the first seven months of the year. That is the reason Class III futures are now above Class IV futures through the month of February. That has not happened very often over nearly the past two years. Spot butter price has been more stable than cheese prices over the past few months.
Based on the volume of butter traded over the past month on the daily spot market, it would indicate butter may have a more difficult time moving much higher through the rest of the year. Sellers have been active with buyers purchasing what is available. Buyers have been able to increase ownership of supply without having to be aggressive. The more that can be purchased now, the less aggressive they will need to be as holiday demand increases. This may leave the market will limited upside potential similar to what we have been seeing. Butter futures have no extra premium in contracts and indicate weaker prices through the end of the year and later. This is unusual are generally futures will hold a premium to cash.
Much can happen during the rest of the year that could change prices significantly. If exports improve as they are expected to, and domestic demand improves, prices could find further support. Slowing milk production is expected to show further declines, remaining below a year ago through the rest of the year. Dairy farms are not expected to be aggressively adding cows to increase milk supply at current prices. Milk prices will need to improve much more for that to happen.
The huge hurdle standing in the way of cow numbers being maintained or increasing is that income over feed is very low. We may see improved milk prices over the next few months, but feed prices may also remain strong, which may not provide much benefit from improved milk prices. We do not know what yields we will have from this year’s crop until harvest. There is concern over the recent two bouts of very hot weather that have been experienced in the Corn Belt that could have a significant influence on final yields. Increasing milk prices may not always mean more profitability if feed prices increase.
Since 2020 we have seen much variation in income over feed with this taking on more importance as an area that needs to be monitored more closely. This chart is just a picture of what has been seen over the past four years. There have been earlier years during which milk prices have been very good yet income over feed has not been good. We can only hope milk prices will improve while feed prices will hopefully decrease as the year progresses with harvest resulting in a good supply of feed at lower prices.
If you are attending the World Dairy Expo this year that is being held during the first week of October, stop by our AgMarket.Net booth number 664 located in the Trade Center. I would enjoy meeting with you and show you what we have to offer. I also will be speaking during the Knowledge Nook session at 1:30 PM Thursday on the topic, “Focusing on Income Over Feed Rather Than Just Milk Price”.
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.
