I think we can be confident the low for milk prices is behind us for now. August milk prices will be much better than July, but still far from where we would like them to be. It has been interesting to see the attitude of traders over the past month. There has been an element of bearishness or disbelief that underlying cash prices would see the strength they have or would continue to see strength. There has been a reluctance on the part of traders to put price premium into milk futures.
There seems to be the anticipation that slower export demand and strong milk production would be a limiting factor to upside price potential. That is a logical assessment based on the volume of milk that was available during the first half of the year. One must remember that the amount of milk available on the spot market at discounts of up to $11.00 per cwt for nearly seven months and milk being dumped during spring flush was not only the result of strong milk production, but maybe more of the impact that plants were unable to process the milk. Not because of plant capacity but more a result of what plants were able to process because of their workforce. Many plants were struggling to find and maintain a full workforce to keep plants running on full schedules. This prevented many from being able to operate at capacity even though spot milk was available at substantially reduced prices. The result was less output and less inventory growth.
This puts the market in an interesting position. Traders have been reluctant to turn bullish on the market which has resulted in little or no extra premium being added to milk futures even though spot prices have been increasing. Over the past nearly two months, block cheese price has increased 71.75 cents while barrels have increased 48.50 cents. September Class III milk futures have increased $2.83 with October futures up $1.31 over the same period. Generally, increases in cheese prices of that magnitude would have had a larger impact on milk futures. They certainly did in other years and most recently in 2021 and 2022 when strong cheese prices eventually propelled milk prices to record highs.
In 2022, cheese inventory increased above year earlier levels for much of the year. This year, inventory has been running below a year ago for most of the months so far. Once would think this should set up a more bullish scenario for Class III milk prices. So why are traders more hesitant this year to add premium to futures in anticipation of higher price? We need to look no further than dry whey. One year ago, dry whey was 46 cents per pound compared to 27 cents per pound today. That, in and of itself, accounts for a difference of $1.14 of the Class III price. In early 2022, both cheese and dry whey prices were rising increasing the value of milk and increasing the bullishness of traders. The dry whey price eventually peaked on February 8, 2022, at 86.75 cents and a record high. Traders and the industry do not anticipate dry whey prices to follow a similar pattern with current fundamentals indicating dry whey price may have a difficult time moving significantly higher the rest of this year. That keeps an anchor on the market and traders skeptical.
Butter is similar in that price has increased significantly gaining 35.25 cents over the past two months which should translate into higher Class IV milk prices if it were not for the low price of nonfat dry milk. A year ago, nonfat dry milk price was $1.26 per pound compared to today’s price of $1.10 per pound. This is not quite as dramatic as dry whey but still rather significant. On February 14, 2022, nonfat dry milk price peaked at $1.90.
Milk futures have not moved as much as they usually do when cheese or butter prices increased due to the lack in strength of the powder markets. This is what has kept traders from being more bullish and what has kept them from adding extra premium to milk futures in anticipation of higher prices. Cheese and butter futures generally hold a premium of some sort to underlying cash, but we see none of that currently in the market. What we need to see is greater demand developing and supply tightening for both nonfat dry milk and dry whey both domestically and internationally. That would turn the market more bullish and traders more apt to add premium to futures contracts.
The best way to approach the market if you are looking to protect some of your milk production is to use options strategies or Dairy Revenue Protection insurance. Forward contracting is not a good strategy right now as it locks in a specific milk price without any possibility of taking advantage of any upside potential. We can help you with either of these as we are a full-service brokerage and licensed insurance agent.
For more on milk prices, read:
- Market Analyst Offers Insights into Dairy
- USDA Raises All-Milk Price for the First Time in Months
- DMC Payments Surpass $611 Million for the First Half of 2023
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.
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