Here’s what’s leading traders to eliminate the discount that futures contracts have held in anticipation of a price decline.
Trader’s attitudes have changed over the past week or so as portrayed by Class III futures contracts. Since late last year, subsequent futures contracts have carried a substantial discount to the underlying cash and front-month contract. Record milk prices have been viewed with trepidation and the idea that high prices will cure high prices.
Historically, high prices have always resulted in a rapid price decline and, most often, faster than the time it took for prices to increase. That sentiment has been prevalent as record milk prices have come and gone earlier this year. However, the prevailing attitude seems to be that cash prices have settled into a range. This resulted in futures contracts through September moving in close proximity to each other. Gone is the discount once held in each subsequent month in anticipation of a price decline.
Despite increased cheese production, prices seem to be content in the vicinity of $2.00, with buyers and sellers doing business as needed. Overall demand is good, with extra moving to inventory. Cheese manufacturers seem to be mixed in their approach to current cheese production. While some desire to pick up the discounted milk available and are keeping plants running at capacity, others are limiting intakes to keep production in line with demand.
Although cheese stocks are behind year-ago levels, they are not as concerning as butter stocks. However, the same diverse ideas are prevalent. Some plants are running at capacity while others have opted to sell a portion of their cream supply to capture good prices while keeping production in line with demand. It is unlikely butter inventory will come anywhere near last year’s level by the end of the year. Although export demand is slowing as a response to continued strong prices, domestic demand remains good, making it difficult for inventory to increase to any great degree. This is a significant concern for the butter industry, keeping good price support under the market.
Demand and inventory of cheese and butter, as well as a strong whey price, are giving traders confidence to virtually eliminate the discount that futures contracts held for quite some time. It is normal for futures contracts to actually hold a premium to the underlying cash, with September and October seasonally posting the highest prices of the year. This reflects the greatest demand time as buyers are looking forward to expected demand through the end of the year.
The burning questions are: How much growth in milk production will be realized through the end of this year? How strong will demand remain? We continue to see the desire of dairy producers to increase production in response to high milk prices. May milk production showed the greatest gain this year with an increase of 1.4% nationwide. Dairy cattle slaughter declined to 209,000 head, the lowest monthly slaughter in three years. We can definitely see the desire is there to capitalize on good prices. It will be up to the international and domestic consumers’ willingness to dig deeper in their pockets and continue to purchase dairy products at higher prices.
- May Cold Storage report on June 23
- June Agricultural Prices report on June 27
- Planted Acreage report on June 30
- Quarterly Stocks report on June 30
- June Federal Order class prices on July 2
- Dairy Products report on July 3
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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