Traders are both optimistic and pessimistic as the market sits in a precarious balance.
Fundamentals currently prevalent in the dairy industry make for a very interesting and precarious market.
Traders are optimistic about milk prices yet pessimistic over the strength of milk prices. Optimism stems from the resilience shown in cheese prices since mid-May. Since then, the cheese price has dropped below $2.00, only to find buyer interest pushing it back above that level. If this pattern continues, milk prices will remain strong through the rest of this year.
Pessimism stems from the pattern also seen since mid-May of a rebound in price unable to be maintained. Sellers are more aggressive at a higher price, resulting in selling overwhelming buyer interest. What we are seeing is a balanced market in a trading range. It is unclear what will change this pattern.
One would think outside influences would provide the catalyst to change this pattern and set a trend. However, cash and futures prices seem immune to these outside influences at this point in time. Buyers and sellers are focused on taking care of business when they need to and fill orders when they have to.
We have continued to see the disparity between world prices and domestic prices for quite some time. This has had limited influence on daily spot trading and milk futures prices. As long as demand is good and business is being done at current prices, it is immaterial what the potential impact is until it becomes a reality.
Global Dairy Trade auction weighted average prices continue to decline. The small bounce in price a month ago was little consolation to the overall weak trend. World prices have declined for 10 of the past 11 consecutive trading events with the traded weighted average price down to its lowest level since Oct. 12, 2013.
Butter price continues to run about $1.00 above world price. This may be about to run out of strength. Not that price is going to fall apart anytime soon, but I expect price to soon begin moving lower. Export interest has slowed considerably and will continue to do so as time moves on. Much of the strong export volumes seen the first four months of the year were the result of commitments made late last year and those contracts needing to be filled.
However, this is changing. May exports showed a declined of 7.5% from the previous year. This is the first month of negative exports since May 2013. The Foreign Agricultural Service indicates quota imports of butter during the first five months of the year increased 75% over the same period of time last year. So, it appears the handwriting is on the wall. The one thing that is going for us and which will support price is the fact that inventory is substantially lower than last year. Slower exports and reduced demand will be absorbed readily and will be welcomed as stocks show greater cushion. The job of the market will be to keep the scale from tipping the other way at some point down the road. The industry needs to exercise caution to balance price, supply and demand.
Grain prices are another area that will have a substantial impact on milk prices. USDA’s release of estimated corn ending stocks of 1.801 billion bushels of corn and 414 million bushels of soybeans for the 2014-15 crop year was bearish to prices. There are a few analysts who have estimated higher stocks due to good crop conditions and the lack of hot weather predicted through the pollination period. Corn ending stocks could be over 2.0 million bushels with soybeans over 500 million bushels. If this were to materialize, corn price could move to between $3.00-$3.50 with soybean price around $9.50-$10.00.
How all of this will impact milk prices is yet to be seen, but lower world dairy prices and low feed prices may likely result in lower milk prices.
- June Cold Storage report on July 22
- June Livestock Slaughter report on July 24
- July Federal Order class prices on July 30
- Agricultural Prices report on July 31
- Dairy Product Production report on August 1
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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