In today’s global economy, everything from China’s currency valuation policy to the price of crude oil impacts the dairy sector and your milk price. How much can milk prices withstand bearish pressure from “outside markets”?
By Steven Schalla, Stewart-Peterson
Over the past several months, there has been a lot of good fundamental news for milk prices. While cow numbers have increased by 176,000 head since March 2010, these gains have been largely limited by historically high cull prices that have led to huge dairy cow slaughter figures.
In addition, Cold Storage figures for cheese continue to run below year-to-year average growth of about 5%, with the last two months reported at 4% and 3% increases respectively. Butter stocks are ever so slowly recovering, but still remain 25% off from a year ago. Much of this can be explained by the phenomenal exports seen for cheese and butterfat this year as Oceania struggled through another lackluster production season.
And most important, national milk production has been in line with average growth rates at 2.2% year-to- date and, if anything, have left processors looking for additional supply.
All of these factors have contributed to the strong prices currently seen on the Chicago Board of Trade. Class III prices have challenged $18.00/cwt. in some months next fall, while Class IV values have exceeded $20.00. With the fundamental picture described above, many producers are expecting strong prices to continue through the end of the year.
So, what are we telling our clients right now? In working with each of my clients, my goal is to prepare them for any type of price trend and milk price. While there are many positive fundamentals for milk, we’re also planning for a less rosy picture. Here’s a scenario I’m visiting with my clients about, in an effort to be ready for anything:
Possible “outside market” impact
In the past several weeks there have been developments in the “outside markets” that could put some real pressure on the milk complex. Does milk have enough strength and bullish reasons to stand on its own? In globally connected markets, how much can milk prices withstand bearish pressure from “outside markets?”
Before diving into this analysis, let’s first define what is meant by “outside markets.” Naturally, there are additional financial markets that will have a direct or indirect effect on the dairy industry and thus milk prices. A simple example is grain market price changes affecting feed costs and farm profitability.
Another traditional example is the U.S. dollar and its impact on exports. More recently, other markets also have become more influential, such as the U.S. and international stock markets being used as a benchmark of consumption trends and spending ability of consumers. In today’s global economy, everything from China’s currency valuation policy to the price of crude oil impacts the dairy sector and your milk price.
Since last summer, the trend for commodities has been higher. The Continuous Commodity Index, which is an index of all commodity prices, rose 54.6% from June 2010 to the week of April 16, 2011. While each commodity sector has had bullish news, the sinking U.S. dollar has been an underlying supportive factor. In addition, inflation fears have led to commodities being a trendy market for investors.
However, since the week of April 16, there has been a quick and dramatic shift in these trends. The U.S. dollar posted a key reversal to start the month of May, and the Continuous Commodity Index broke dramatically lower. As demand for many commodities shows signs of rationing at these historic price levels, energy and grain prices have reversed as supply concerns ease.
As it relates to your dairy, this shift in commodity trends is a doubled edged sword. With higher milk prices, profitability would increase quickly, and so could national milk production as producers take advantage of the opportunity. The simple domino effect of this scenario goes like this: Fragile consumer spending (here and abroad) hinders demand, commodities shift to a lower trend, and milk gets dragged downward despite good fundamentals.
This is one of several trends that could materialize in the coming months. As milk-price risk and opportunity managers, our goal should be to prepare for whatever the market may do. In today’s world, prices react to just about anything, so why not be ready for anything?
Maybe the more challenging question is, “How can I be ready for anything?”
- First, consider your current strengths and weaknesses as a risk manager and marketer. Key constraints could be knowledge, time or discipline. Ask yourself, “What is preventing me from managing risk and marketing well?” Then resolve to remove the barriers and get it done.
- Second, consider marketing strategies as they affect 100% of your milk production. Marketing, say, only a third of your milk isn’t going to protect you enough, or secure meaningful opportunity. There are ways to layer strategies with incremental portions of your milk.
- Third, run an analysis on the impact of each potential strategy. This can quickly show which positions will help your situation the most, and which will do very little.
- Finally, and probably the most important advice for today’s marketer, is, “Don’t be distracted.” Our experience continues to show that successful marketers are far less concerned about why the market is moving, and instead focus on what their next step will be. This shift in focus in easier said than done, because we all want to understand “why.” The results, however, are rewarding.
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