Seasonal Price Increase May Not Materialize

Dairy demand generally increases seasonally during this time of year as more milk moves to bottling for school systems and more cheese is being purchased in preparation for the fall and holiday demand period. Football season is upon us and with it generally comes higher demand for cheese. Packagers and recutters already are, or will soon be, purchasing supply in preparation for gift boxes and other fare for the holidays. I know it may seem somewhat far way, but these preparations are already being made. This often increases prices as buyers become more aggressive.

So far this year, it has not been the case. Buyers have been able to purchase cheese without having to be very aggressive. There were a few times during which there were some good price moves as buyers needed to step up and purchase to fill orders or replenish aging programs, but those increases were short-lived. Block cheese has been in a sideways trading pattern since November ranging from $1.46 to $1.83. This is similar to what it was in most of 2017 and 2018.

The result has been the continued erosion of milk prices. Class III futures carried a significant amount of premium in the market in the anticipation of stronger prices as the year progressed. The September contract provides a clear picture of this. Since November, price moved nearly $3.50 higher into May, but has now fallen back to the same level it was in early November. Not all of this was just premium in anticipation of a higher price at this time. It moved higher as cheese price moved higher, but continued to maintain extra premium in anticipation of stronger prices. But as we see, that was not needed and all premium has been eliminated as it is the nearby month and futures are following underlying cash prices very closely. This has not only taken place in the front-month September contract, but all contracts through the end of the year. October through December hold very little price difference. In fact, both Class III and Class IV milk futures show a price swing of about 75 cents from high to low through the end of 2022. Now, there is a strong probability that price fluctuations will be wider than that, but it certainly is a sobering thought. If prices cannot increase during a high demand period of time, what will they do when demand is not as strong.

Milk production so far this year has remained stronger than last year and stronger than anticipated due higher feed prices and hot weather. Higher feed prices were thought to result in heavier culling and reduced milk production; but that that was not the case. Hot and humid weather in much of the nations was anticipated to reduce milk production as some areas posted record temperatures; but that was not the case. Drought conditions in some areas of the country was expected to impact milk production; but such was not the case. High feed prices drought may eventually have an impact, but it has not yet had the impact that was anticipated.

This is why preparation is so important for each dairy operation. Farms prepare for hot weather by implementing various cooling methods for cows. Preparation is made for cow comfort and cleanliness. Preparation is made for harvesting good quality feed for optimum milk production. Preparation is made for efficient and consistent milking procedures, etc. However, preparation for protecting income for the entire operation is many times not done. Income is left to whatever the market pays. I know I have said this numerous times, but it still hold true. Each farm needs to have a program in place to protect income. There are numerous marketing tools available that can either lock in a specific price or establish a price floor. Some are subsidized by the government while others are through direct use of futures and options. Some are best used by themselves while others are effectively used in combination with others. The focus should be to establish protection as well as allow for flexibility.

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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