There certainly has been a lot of volatility in 2020 with COVID-19 and government programs the two main catalysts for creating that volatility. COVID-19 initially severely curtailed dairy demand as manufacturers and suppliers had orders canceled and supply lines disrupted causing prices to drop as supply became overwhelming. Retail demand increased after the initial shock only to find a lack of products with some forms of rationing taking place. Dairy prices plummeted. However, government stimulus and the Farmer to Families Food Box program increased demand resulting in a shortage of sorts resulting in block cheese price rising to a record level. Cheese and milk prices began declining after a period of time only to rise substantially again after another Farmers to Families Fox Box program was announced. These were the main reasons for the extreme volatility in milk prices. Price movements and prices spreads set new records.
That set the stage for the end of 2020 and for the upcoming year. We have just experienced some of that once a little more was known about the new stimulus bill and what was in it as far as a food program was concerned and money to compensate for milk donated to food pantries. Traders reacted dramatically as they looked over their shoulders being reminded of the impact government programs had on during 2020. Emotions ran high. For example, the February Class III contract increased $2.44 cents from the low to the high over the period from December 21st through the 23rd. It then fell $1.30 from the high on the 23rd to the low the following day. Underlying cash prices did not support the large price increase of earlier in the week. If we look back to the first half of December, we experienced substantial volatility as well while the stimulus bill was in the works. February futures increased $1.86 during the first two weeks and then fell $1.75 the following week. All of this was the result of anticipation and emotion with no real solid fundamentals behind it.
Block cheese prices has remained in a sideways price range of 10 1/4 cents since November 18th. Barrels were in a tight price range of 7 1/2 cents from November 16th through December 21st. Barrels then showed a quick one day price jump and promptly fell back to where it began over the course of two days. Thus, the fundamentals have not been supporting the volatility of Class III milk futures. But that is why it is called a futures market. Traders anticipate what prices will be at some point in the future and that is what makes a market. If the market would trade only according to strict fundamentals, it would be a very boring market. Emotion is what gives it life.
In analyzing the market, one needs to look back to the previous year or years in order to try to find patterns that might be useful in anticipating market movement for trading or hedging purposes. Having said that, it sets the idea that 2021 may likely be another very volatile year and one that will provide dairy farmers with opportunities to protect some attractive milk prices.
I have been a broker since milk futures and options began trading in 1996. There was the thought that the futures market was going to eliminate price volatility as it was going to smooth the market out. Nothing has been farther from the truth as volatility has increased and continues to increase. This is not only the case in dairy market, but the same can be said of all commodity markets. Whoever thought crude oil price could go deeply negative for a short period of time? Other commodities are posting multiple year highs with the stock market also reaching record highs.
It certainly has been an interesting year with 2021 almost assuredly one that will be filled with much emotion.
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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