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Dairy Price Rebound Ahead after GDT Cool-Down?

May 20, 2013

Though the spring price rally has stalled, summer is poised to bring weather-driven markets, lower milk production and resurging demand.

Derek Nelson FC Stone copyBy Derek V. Nelson, INTL FC Stone

The results of the GlobalDairyTrade (GDT) auctions over the past several months have been a key factor reflected in the rise of dairy prices both here in the U.S. and on an international basis, most noticeably during the rally witnessed in the months of March and April when Class III prices gained over $2 per cwt.

The rise of the GDT prices reflected continually disintegrating conditions in New Zealand as scorching heat and the most wide-spread drought experienced in 30 years devastated pastures and curtailed the milk production of the dairy product exporting juggernaut.

For the months of March and April, the GDT Trade Weighted Index (TWI) Price Index rattled off double-digit gains for three consecutive events before tapering off. Domestic dairy futures soared. Class III prices eclipsed the $20 per cwt. level, butter futures pushed into the upper $1.80s and NFDM into the mid-$1.70s. Then, during the mid-April event, rains finally returned and alleviated immediate concerns relating to dairy product availability out of New Zealand. Tempers cooled, bringing to a rather abrupt end the explosive rally in prices of the dairy commodities.

Through the month of May, the past two GDT auctions results have portrayed a shifting away from the bullish sentiment that feverish gripped the dairy marketplace. Gone are the calls for $2.00 + cheese and $25 per cwt. Class III milk, having been replaced by a pessimism, has producers looking to protect their downside price risk while dairy end-users sit on their hands waiting for the bottom to develop in the markets before locking in their needs for the remainder of the year.

FC Stone graph 5 20 13So, where will the markets go from here, and what are the factors that will be driving price action in the near term?

Despite the slumping GDT auction prices, there remains a tightness of dairy products around the globe. The heavy rains in New Zealand have done little to salvage the tail end of their production season and, without up-to-date cull numbers out of the region, we cannot be too certain that their production rates will return to the levels seen during the 2011/12 season. European production has been hampered by a lingering winter and a less than ideal spring. Domestically we have had our own weather issues to contend with as a late-emerging spring in the North and a rapid escalation of temperatures out West have created an uneven and staggered spring flush across the nation.

Feed prices have benefited of late due to the sharp decline in grain prices, but concerns related to forage supplies in the Midwest and the Western states have led to rationing and/or alterations to feed mixtures, which have a negative impact on production levels. While the heavy rains over the past month have gone a long way to reduce drought conditions in much of the Corn Belt, the rain mixed with cool temperatures across the nation has whittled consumer demand as the grilling season has yet to materialize in many parts of the country.

Currently, domestic dairy commodity prices reflected upon the Chicago Mercantile Exchange have found a modicum of support, though continued weakness in the near term running through early June should be expected before summer’s heat starts to tamp down on milk production levels. The dairy markets -- like the grain and feed markets -- have become weather-driven at this time of year. As temperatures rise across the nation as we enter the long-awaited summer months, demand should increase, cutting into the burgeoning product supplies that have accumulated over the past several months, leading to a rebound in dairy prices across the board.

Derek Nelson is a Risk Management Consultant with the Chicago office of INTL FCStone. INTL FCStone offers comprehensive risk-management and margin hedging programs and services to dairy producers, processors, traders and end-users. You can reach Derek at 312-456-3623 or derek.nelson@intlfcstone.com

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