After averaging more than $21 during 2014, the Class III milk price is headed south and Class IV is poised to do the same. After averaging $22.50 this year, I expect an average in 2015 of $16.50.
My forecast is subject to change: Both prices could be lower than my current forecast. On the other hand, Mother Nature is about the only thing that stands a chance of pushing these prices higher.
When the marketplace speaks, milk producers listen. When the marketplace says, "I will pay you significantly more than $20 for your milk," milk producers listen and make more milk.
The Kiwi’s started the whole thing. After suffering through a drought, milk producers in New Zealand got back on their feet during the second half of 2013. January through June of this year, production was up 16.3% versus 2013 and up 2.3% versus 2012.
European milk producers suffered through some ugly weather and a cost-price squeeze, but then launched their own recovery during the second half of 2013. During the first half of this year, the EU-28 cranked out 5.1% more milk than this past year and 3.5% more than two years ago.
High feed prices and bottom-lines that had been battered for most of the past five years held U.S. producers back … until July. Cow numbers were building during the first half of this year, and in July a combination of forces unleashed production per cow. Milk production was up 3.9%.
My forecast has milk production in the U.S. up at least 4% throughout the second half of this year, continuing on into 2015. More milk is also on the agenda for producers in Oceania and Europe.
In response to more milk, international dairy product prices started tumbling lower in February. Prices peaked at about $5,400 per metric ton and have now fallen to less than $3,000. At $4,400 per metric ton, products are priced at $2 per pound.
Strong demand here and abroad have been supportive of U.S. dairy product prices for more than a year. Factor in slim inventories, and domestic prices have even more support.
However, that puts U.S. prices at a substantial premium to prices in the rest of the world. Early this year, the Chinese were on a buying binge. With their warehouses full, they have backed away from the market.
Recently, world dairy markets were caught up in the Ukraine-Russia confrontation. With Russia banning imports from Western Europe, more than 500 million pounds of cheese probably needs to find a new market. Or at the very least, a new route.
More milk, slackened demand and political turmoil are adding up to a very large price correction in the U.S. The U.S. premium to the world is on the brink of ending.
Hence, my forecast: Be prepared for Class III milk price below $16 and Class IV prices near $16.50 by third quarter of next year.
If the current price trend continues into 2015, Class III futures offer an attractive pricing opportunity.