Lately, commodity markets have been like the weather. Wait a short period of time and prices change substantially. Even commodity brokers such as myself, have been amazed at not only the day to day volatility but the intraday volatility. News has had a large impact on many commodity markets resulting in consistent price swings in some markets that none have of us have experienced before. It is very likely this will continue for some time to come.
Dairy markets have seen their share of substantial price swings, but not directly tied to world events such as has taken place in many other markets. Dairy prices have seen volatility due to actual fundamentals as well as heightened trade perceptions. The contraction of the nation’s dairy herd that began last summer began changing the outlook for milk prices with the actual impact beginning later in the year as milk prices began rising. Substantially higher costs of production due to drought in some areas and widespread increases in goods and services, resulted in heavy culling, cow numbers declining as well as farms exiting the dairy business.
Continuing issues with the labor force in not only the dairy industry but also in businesses that the dairy industry relies on for the movement and distribution of product has resulted in retail and food service industries placing orders earlier than usual in order assure timely delivery of product. This has caused buyers to purchase ahead in order to make sure they have sufficient supply on hand to meet these earlier orders. The just in time mentality seems to have become a thing of the past for the time being. Buyers would rather increase ownership now and pay extra for storage to avoid having to chase the market later if supply tightens. This requires some forward thinking. Buyers of butter are reportedly not only purchasing for the next few months but are also purchasing for third and fourth quarter expected demand. Cheese buyers have already been increasing ownership of cheese into the third quarter. But we need to remember the block cheese that is traded on the daily spot market is fresh cheese under 30 days of age. That is what drives the market. So even though cheese is purchased ahead of time for later in the year, fresh cheese may still be in high demand by that time which would continue to support prices resulting in continued high milk prices.
It is difficult to determine just how long milk prices will remain high and how much they will increase. Prices increase for the purpose of eventually slowing demand to ensure the market does not run out of product. Once that level is reached prices either hold or fall back depending on how much demand may be affected.
An example of this is dry whey. Price has already declined significantly from its record high established February 8, 2022 at $0.8675 per pound and has fallen back to $0.61 by April 1, 2022. This is a decline of $0.2575 which equates to a decrease in the Class III price calculation of $1.5450 as a one-cent decline of dry whey equates to a six-cent decline in Class III. The impact has not been blatantly obvious due to the increase of cheese prices. The chart below runs through the end of 2021 and shows the impact high price has had on the dry whey market historically.
Price peaked at $0.7933 per pound on April 21, 2007, falling to $01535 by February 7, 2009. Price then reached back to $0.6969 per pound on January 14, 2012, followed by a decline to $0.2256 on October 15, 2015. High prices reduced demand as companies sought alternatives for dry whey in feed or food. Once those alternatives are utilized, it takes some time for these end users to switch back to dry whey again. Both of these historical declines of dry whey were followed by lower milk prices.
Price is not expected to fall as low as it has previously, but further declines may be possible and could have a similar impact on milk prices. We all remember the low milk prices of 2009 and the period of low milk prices after the record high of 2014. Markets are different from year to year, and I am not predicting a fall of milk prices as it did those years. Cost of production is substantially higher, and demand is robust both domestically and internationally. However, historical market movements and trends are an important tool of market analysis.
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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