Market Watch Diary: Milk Speculators

November 17, 2010 09:26 AM
Market Watch Diary: Milk Speculators

“Looking for the next gold? Try milk,” suggested a headline in the Nov. 9 issue of the Globe and Mail, Canada’s largest national newspaper.

The article, by investment columnist David Parkinson, recommended that investors play the commodity price run-up by buying Chicago Mercantile Exchange milk futures, which in early
November hadn’t yet followed the corn market higher.

Notwithstanding that the Canadians have a controlled dairy market that is isolated from global supply-demand forces, the advice strikes a couple of chords for those following the U.S. market.

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CME Group resources

CME Group: Class III Milk Futures

First, the fundamentals suggest it may take a while before milk catches up with corn. Because of lags in the pricing system, dairy producers were still receiving $18/cwt. for milk in November, even after commodity cheese and butter prices had crashed.

Milk production was up more than 3% in September and on track to post additional 3% to 4% gains in the fourth quarter. Milk volumes in Europe and New Zealand were expanding as well, putting pressure on international commodity prices.

By January, milk checks should reflect the weaker markets, but it could be several months after that before production finally responds. Margins will be pinched like they were in 2009.

For the first time in more than seven years, there will be no Cooperatives Working Together (CWT) herd retirement. Ironically, without CWT buyouts, we may see supply contract more quickly than in recent history.

While this adjustment is taking place, it’s difficult to know what impact retail investors will have
on milk futures. The Globe and Mail quotes Shawn Hackett, a Florida-based financial adviser who sees a “huge buying opportunity in milk.” Hackett has been “loading up on milk lately, and advising his clients to pour themselves a few glasses, too.”

If this behavior is replicated by investors around the world, it could result in a boost to milk futures that provides hedging opportunities for U.S. dairy producers.

Eventually, milk prices have to align with the cost of production. But given the time it takes for dairy markets to respond to price signals—and the propensity of milk supply to overcorrect—we’re setting up for very tight markets in the second half of 2011.

That could make the Globe and Mail’s investment recommendation look remarkably prescient, if off by several months.

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