Most of the state fairs may be over for this year, but the roller coaster is still around. Dairy prices appear to be headed for another wild ride.
First, a look at the near-term: The crystal ball at USDA foresees some upside to the cheese and nonfat dry milk price, flat whey prices and downside for the butter price during the final few months of this year, according to my analysis of the farm agency’s latest forecast.
The forecast was published in World Agricultural Supply and Demand Estimates report and the Livestock, Dairy and Poultry Outlook. Both forecasts were released in August.
USDA is expecting the Class III milk price to average $17.90 for all of 2013. So far this year, the Class III milk price has averaged $17.69. To hit the USDA forecast, the Class III price needs to average about $18.20 from now through December.
The Class IV milk price is forecast to average $18.40 for the year. January thru August it averaged $18.27; therefore, it should average $18.58 through the end of the year.
I’m more bullish about the fourth quarter of 2013 but must quickly add that: (1) right now, there is plenty of milk available, and (2) inventories are atypically high, with butter stocks to the point of being ridiculous. It will take very strong sales during the fourth quarter to trigger much upside in prices, but I do believe sales will be robust.
Domestic demand continues to build. The seasonality in supply and demand will, in my opinion, be more supportive than usual this year.
International buyers have been slow to pull the trigger on orders, but product supplies in Europe are relatively tight, and milk production is on its seasonal decline. The new season is fast approaching in Oceania, but there is still a window for U.S. exporters to make some additional sales.
Bottom line: There will be some price strength during the last few months of 2013.
Next year is another story. USDA is predicting that U.S. milk output will total about 204.5 billion pounds, up 1.2% year-over-year. I believe the increase could easily be twice that much. If corn and bean crops are as large as currently forecast, the milk supply will surge, fueled by the lower feed prices and vastly improved margins-over-feed costs.
Yes, the most recent crop forecast trimmed earlier expectations, but it still spells sharply lower ration costs.
Yes, futures prices for the first half of next year have taken a hit. However, locking in respectable margins over feed costs can still be accomplished. If the cash price strength that both USDA and I foresee this fall materializes, there should be some additional hedging opportunities still to come.
But don’t wait until the last minute to get all of your coverage in place, or you will have to buy another ticket for the roller coaster.