Is The Market Changing And Will Milk Pricing Change?
Recent price moves have been very positive for dairy markets and one that has long been waited for. In about 1 1/2 weeks, Class III milk futures have eliminated 2 1/2 months of losses. Block cheese price finally broke outside of the lengthy sideways trading pattern it had been in while barrel price has been trending higher for the past month. Is this the beginning of a change in the market? It is too early to tell as there are many factors involved in price trends.
The time of year is right for increased demand which generally results in higher prices. However, increasing buying interest and higher trending prices generally begin earlier during the year rather than late September. Historically, milk prices peak in September or October before trending lower after the surge in buying for the holidays subsides. This year, price strength has been delayed and could possibly last longer in induration depending on the level of demand experienced as the last quarter of the year progresses. The past two years, we saw higher prices reached in November with a few years prior to that showing stronger prices through November and in some cases through the end of the year. So it is not out of the realm of possibility that price could strengthen through the end of the year. If current Class III futures prices can hold, October both October and November will be above $18.00. The last time the Class III price was above $18.00 was the month of May.
The concern is just how much cheese will be available to supply demand through the rest of this year and the impact that will have on the potential for milk prices. Inventory of American cheese in August actually increased allowing for more to be available to the market. In fact, all inventory of cheese is higher than it was a year ago. Inventories will need to decline in order to see sustained price gains that could last through the end of the year and into next year. Culling of cows is increasing and milk per cow is declining, but milk production still remains higher than a year ago. This will keep demand satisfied reducing or eliminating the concern over supply tightness.
Even though there were very strong Class III milk prices last year reaching a record high, this was not reflected in actual mailbox prices due to the simple average of the Class III and Class IV prices plus the $0.74 fixed price adjuster plus the Class I differential based on location. The result of this pricing mechanism that was implemented in 2018 was substantial negative Producer Price Differentials (PPD’s). This took dollars away from producer’s milk checks.
There has been much discussion over changing the pricing formula again with some call for an immediate return to the higher of Class III or Class IV pricing system. This takes the higher of plus the Class I differential based on location to determine the Class I base price. Then, a new pricing formula can be pursued to find a pricing mechanism that might better fit the needs of the current and future market situations. A few ideas have been put forth so far, but it may be a lengthy process in order to put something new in place. That is why there is the current call to revert back to the previous system immediately rather than waiting until possibly the next farm bill before anything will change. It will likely be a lengthy process, as it usually is.
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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