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Market Cycles and Class III Price Patterns: A Closer Look
Apr 30, 2012
The Class III milk market reveals a pronounced, three-year-cycle low pattern, which has become an accepted pattern of milk price behavior. Here's a closer look at how price patterns have unfolded since 1996.
By Carl Babler, Atten Babler Commodities
As a commodity price rally rolls over, and a trend or cycle price high is identified, attention shifts to evaluating how low prices may fall. A number of sophisticated technical price analysis tools are available for evaluating potential price objectives based solely on price and time data.
We have chosen another technical evaluation approach. Price-pattern history is a simple approach to evaluating forward price objectives fully based on price patterns of the past. The Class III milk market portrays a pronounced three-year-cycle low pattern, which has slowly become an accepted pattern of milk price behavior.
We will look deeper into the cycle pattern. See the chart below. The monthly Class III milk futures price shows the cycle’s high and low price for all cycles since 1996. When looking at past price history of a commodity, it is often debated that fundamental factors have changed in a given market; thus, the patterns of the past are not relevant. Market participants often continue to discount price patterns even as those patterns continue to unfold.
First off, be reminded that no one knows where any commodity price is going at any time in any market, myself included. However, we can define producer price risk in terms of where milk prices could go, based on patterns of the past. Our analysis requires only observation.
Such observation reveals that prices dropped off the cycle highs as indicated:
• 1997 -- a drop of $10.70/cwt. off the $21.70 futures high
• 2000 -- a drop of $8.90/cwt. off the $17.40 futures high
• 2003 -- a drop of $6.31/cwt. off the $15.89 futures high
• 2006 -- a drop of $9.90/cwt. off the $20.60 futures high
• 2009 -- a drop of $12.16/cwt. off the $21.43 futures high
This small sample of five cycle occurrences of the past 15 years is not statically significant. There is indication, however, that the current cycle low -- based off the 2011 high of $21.62 -- could be anywhere between $15.31 and $9.46, if the 2012 price falls in the range of cycle price drops of the past. The Olympic average of the five price drops is $9.83/cwt. Thus, such a price drop this year could project a 2012 Class III milk-cycle low of $11.80/cwt.
Defining risk may cause those with milk-price risk to accuse the messenger of being negative, cynical or pessimistic. This message is not about gloom and doom. It is about what prices have done in the past. It should also be noted the average price for the cycle low years of the past are also worth noting. The average USDA announced Class III Milk price for the cycle low years in discussion:
• $12.05 average price for 1997
• $9.74 average price for 2000
• $11.42 average price for 2003
• $11.88 average price for 2006
• $11.35 average price for 2009
Managing the risk of a 2012 Class III milk price cycle low using strategies to protect a price of $15.00 Class III or better are fitting.
Risk in purchasing options is the option premium paid plus commissions and fees. Selling futures and/or options leaves you vulnerable to unlimited risk. Transaction cost used throughout this report includes both commissions and fees. Atten Babler Commodities LLC uses sources that they believe to be reliable, but they cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. Unless otherwise stated the information contained herein is meant for educational purposes only and is not a solicitation to buy futures or options.
Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact him at firstname.lastname@example.org or 877-259-6087.