Beware the Euphoria: Rising Milk Prices Yield a Brighter Outlook, But . . .
May 25, 2012
Although milk futures have rallied, exercise caution when attempting to out-guess the market. Here's what you should base your marketing decisions on.
It certainly has been an exciting May for milk futures. Earlier in the month, the June and July Class III contracts were near the $14.00 level. Since then, prices in those contracts have rallied nearly $2.00. This strength changed the psychology of the market to a brighter outlook for milk prices. More articles have appeared indicating stronger milk prices are a real potential by the end of the year.
This is usual as market movement, either up or down, will bring out more bullishness or bearishness with supporting ideas by analysts. USDA makes its price estimates based on market movement as well. It has been decreasing price estimates for milk and products for a number of months. You can almost bet on USDA raising its estimates on the next World Agricultural Supply and Demand report to be released on June 12, unless prices fall back again.
There is validity in the idea that weather will have an impact on milk supply, as hot summer weather depresses milk production and components. Bear in mind this is seasonal, and not a surprise. Farmers have made great strides in reducing the impact on cows from hot weather.
Caution needs to be exercised when attempting to out-guess the market. Many marketing decisions have been made, or not made, based on published analysis and price potential. The bottom line is that marketing decisions need to be based on a combination of fundamentals and profitability of the farm. I cannot stress this enough. As a broker, I have seen many opportunities for hedging lost due to analysis about an outrageous idea for milk prices or capitalizing on a possibility that may or may not happen.
A case in point is a recent article on the potential for a significant tightening of the milk supply due to a warmer-than-average May and warmer-than-usual summer. Although this certainly can come to fruition, it is still just a forecast that could change in the next few days since forecasts are continually updated.
We should certainly be glad Class III futures have rallied as much as they have this month. However, be cautious as the euphoria of the moment may not last if the underlying cash market does not follow. It certainly has been a victory for cheese prices to hold as strong as they have in the face of weakening world prices.
The latest Global Dairy Trade auction showed further weakness in the overall trade-weighted average. This was the third consecutive event posting a decline, and the lowest average since August 2009. In fact, over the past 12 events, there have been only three that had an increase in the overall trade-weighted average from the previous event. The Cheddar cheese price on this global event settled at $1.30 per pound, indicating the U.S. price potential for cheese is limited unless world prices strengthen.
Milk production remains strong as shown on the April “Milk Production” report released by USDA. Production was up 3.2%, with production per cow up 40 lb. from a year earlier, and cow numbers up 5,000 head from the previous month. The nation’s dairy herd is up 90,000 from a year ago, totaling 9.272 million head. May milk is expected to continue increasing over last year.
This report -- coupled with the “Cold Storage” report showing American cheese inventory up 5.8 million pounds to 628.4 million pounds, Swiss cheese stocks at 28.9 million pounds, and other cheese inventory growing by 13.1 million pounds from last month to 367.6 million pounds to push total cheese up 18.8 million pounds to 1.024 billion pounds -- does not indict price strength. Also on the report, butter inventory grew by 45.6 million pounds to a total of 253.9 million pounds. This is 79% higher than a year earlier and the largest year-over-year increase ever.
Look for opportunities to price milk for the year with strategies that will allow you to capture some upside price potential. Do not become complacent in marketing due to recent price strength.
- Commercial disappearance on May 29
- Agricultural Price report on May 31
- June Federal Order class prices on June 1
- California 4a/b prices on June 1
- Fonterra auction on June 5
- Dairy exports statistics on June 8
- Fluid milk sales report on June 8
- California Class I price on June 8
- World Agricultural Supply and Demand report on June 12
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.
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.