Price strength is running contra-seasonal and with good cause. But how long can prices remain this high?
It certainly is exciting to experience record-setting milk prices for February, March and potentially April. March Federal Order milk prices have not yet been announced, but the month is virtually priced and is just waiting until April 2 to finalize prices. April is about one-third priced and on its way to set another record, but is still subject to price movement until around the middle of April.
There is a lot of speculation over how long prices can remain this high. Price strength is running contra-seasonal and has good cause to do so. Strong exports have really been a support to prices. Export demand has been stronger than anticipated and continues to remain strong. Prices on the Global Dairy Trade auction have been slowly moving in the other direction as supply has increased and prices have slowly decreased. Price declines have been subtle due to prices being choppy.
On the last auction, Anhydrous Milk Fat price moved to the lowest level since June 2013. Whole Milk Powder was the lowest price since March 2013. Skim Milk Powder was the lowest price since November, and Cheddar cheese price was the lowest since December. Of course, lower world prices do not necessarily indicate U.S. prices will decline, but it does raise concern over how long prices can diverge without a market correction. Domestic dairy prices above world prices will eventually impact export demand, resulting in a price correction.
There certainly is potential for cheese to decline near $2.00 per pound in a price correction, and most would lament the fact that prices could decline that much. However, it would still be a historically high price. I hear some analysts indicate that a decline of prices would be limited and that a new higher trading range has been achieved. I agree that export demand and domestic consumption should keep product prices from moving down to $10.00 or below as was experienced in 2009. However, it does not mean lows will be confined to levels no lower than $18.00 or $19.00. The job of the market is to stimulate demand with lower prices and to curtail demand with higher prices. Eventually, prices will move high enough to curb demand or stimulate greater milk production, resulting in a price retracement.
Earlier this year, manufacturers were cautiously producing dairy products only to keep in line with demand. Limited production of cheese kept inventory from expanding as usual, with inventory in February declining rather than increasing. Present indications are that Cheddar cheese stocks in March will show further decline. Recent cheese price strength has been the result of buyers stepping up to purchase supply to build inventory for later demand. Time is moving forward and continued strong prices have given more confidence to buyers and manufacturers to purchase and hold inventory. However, the pendulum is swinging back again, causing some manufacturing plants to limit supplies of cheese or dry products due to high prices. This is resulting in decisions being made to sell some milk rather than manufacture products that would increase plant stocks.
Spring flush is in varying stages with some areas of the country, showing strong production while other areas deal with lingering effects of unusual weather and have not yet moved into a period of spring flush. How much milk production will increase during this time of year is difficult to predict, but for the first two months of the year milk production has exceeded last year.
- Prospective Plantings report on March 31
- Quarterly Grain Stocks report on March 31
- Dairy Product Production report on April 3
- World Agricultural Supply and Demand report on April 9
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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