Over the past week, I’ve been struck by the conflicted news, and thus advice, coming on dairy markets. Two examples posted last week on dairytoday.com:
“[There are] $1.20 cheese markets out there globally, and we’re at $1.60. There are $1.09 butter markets out there, and we’re at $1.75. There’s plenty of room for us to come down. That spells lower milk prices and some troubled times.” –Mike North, Commodity Risk Management Group
“The [June milk production] report isn’t a game-changer. Both spot and futures markets bounced (or found aggressive supporting bids) ahead of the report today so it is possible we’ve priced in much of the report already. Moreover, the larger trend to the U.S. dairy complex is still pointing lower. However, we won’t easily excuse this report as status quo. And as such, expect that this report could underpin the market in moments of weakness.” – International FCStone analysts.
And to add to the confusion, is this: Econometric dairy models crunched by dairy economists at Penn State and the University of Wisconsin suggest the current dairy cycle will bottom in August, or maybe September. “The statistical model predicts a relatively rapid increase in the All-Milk price, with a new price peak in November 2016 at just above $22/cwt and the Margin Protection Plan margin reaching nearly $14/cwt,” they say.
So what’s all this pessimism—or hopeful optimism—based on? Mike North points to weak global markets. The Chinese aren’t buying or building inventory, despite low global prices. The Russian trade embargo remains in place. That, in turn, is forcing Europeans to make less cheese that they’d normally sell to the Ruskies and make more milk powder, which then competes with our milk powder sales.
And make no mistake, that’s a big deal. A large chunk of our dairy exports, which consume roughly 15% of U.S. milk production, is sold as milk powder. Even if we continue to move volume, the value of those sales have plummeted.
On the positive, hopeful side, June milk production is up just 0.7%. This is the first time this year that the increase was less than 1%. California was down a whopping 4.3%, negating some big gains in the Midwest.
Cow numbers are also coming down. In January, we had 92,000 more cows on U.S. farms than the prior year. In June, that gap had shrunk to 50,000 head. Dairy culling is also picking up. Year-to-date culling is up 65,000 head. June culling was 22,000 head higher than a year ago.
So what to do about this? Robin Schmahl, AgDairy LLC, summed it up best in his blog
last week: “Hoping milk prices will go higher is certainly not protecting milk prices or equity. No one is able to predict when is the best time to hedge or hedge at the top of the market, but decisions need to be made when fundamentals merit action even if at lower prices.”
Moving forward, there are three courses of action:
- Do nothing. That only makes sense if you have tons of working capital or your farm’s debt-to-asset ratio is so low you don’t really worry about the loss of equity.
- Hedge your bets. Schmahl offers two strategies . Both will limit your downside risk, but cap upside potential if futures prices take off.
- Sign-up for the Dairy Margin Protection Program. If you signed up last year, you’ll only need to pay the $100 administrative fee to be covered for the catastrophic $4 margin insurance. It’s then up to you to decide whether to buy-up higher levels of coverage. (Keep in mind the 25% premium discounts for annual production below 4 million lb. are no longer available.) You have until September 30 to decide.
