Will it be the the milk supply, corn prices or consumers' pocketbooks that drive dairy prices?
Cheese prices have surprisingly remained in an 8-cent trading range over the past five weeks due to seemingly bullish events and perceptions.
Manufacturers were concerned over where the milk supply would be by the end of the year due to high feed prices and increased culling. The draw of milk for school systems tightened manufacturing supply and the availability of spot loads. This came at a time of year when demand increases as manufacturers and handlers took forward to the holidays.
Recently, however, concern over the tight supply has been gradually easing. Production across the country has reached and passed the seasonal low, with some areas showing some production improvement. The Midwest region actually reports milk supplies in some areas to be above year-ago levels. This seems impossible given the summer we have had, yet that is what is being reported.
August’s “Milk Production” report will be released on Sept. 19 and will give us a good picture of how much milk was produced under adverse conditions. The anticipation is for a decrease in production from the previous year. It was anticipated that July production would be lower than last year, but, surprisingly, that is not what happened. So, it could go either way on the upcoming report, but lower production is likely.
USDA anticipates milk production to show little change. The latest World Agricultural Supply and Demand Estimates (WASDE) report released last week showed a decrease of 100 million pounds of milk this year from its August estimate. Production next year is estimated to reach 189.0 billion pounds, unchanged from the previous estimate and down 1 billion pounds from this year. This would be the first year-over-year decline since 2009 and only the second year-over-year decline since 2001.
USDA is not very optimistic on milk prices or product prices for next year. It indicates the possibility of very little change in the average price. The average Class III price this year is estimated at $16.85, while the average price next year is $16.30. Class IV is estimated to average $15.60 this year and $16.45 next year with an All-Milk price of $17.90 this year and $18.35 for 2013.
There has been a lot of anticipation of significantly higher prices with ideas of Class III prices reaching $25.00-$28.00. We have heard high estimates in years past when milk/feed ratios were low and profitability non-existent. However, price has never been able to reach those levels. So far, the record high Class III price was $21.67 set in August last year. Feed prices were not as high then as they are now, and culling has increased significantly, lending to the idea that another $4.00-$5.00 increase in price is well within reason.
However, the question that needs to be asked is, “Will consumers be willing and able to pay for milk and dairy products at significantly higher prices?” The last time prices moved over $21.00, demand began fading, resulting in declining prices. It is very difficult to determine where a price threshold may be.
Milk futures have been following corn futures closely for some time. These two commodities are closely tied to one another. There are indications corn futures may have reached a threshold, with demand destruction becoming evident. USDA did not reduce production for this year’s crop as much as the trade expected on the WASDE report. The inability of futures to break out of the sideways trading range it has been in for the past two months gave credence to the old saying that a short crop has a long tail. This could hold back milk prices from escalating if indeed they continue to follow the historical pattern.
- Global Dairy Trade auction on Sept. 18
- August Milk Production report on Sept. 18
- Federal Order October Class I price announced Sept. 19
- August Cold Storage report on Sept. 21
- August Livestock Slaughter report on Sept. 21
- Consumer Confidence on Sept. 25
- Agricultural Price report on Sept. 27
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He can be reached at 877-256-3253 or through the firm’s website at www.agdairy.com.
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.