By Andy Novaković
E.V. Baker Professor of Agricultural Economics
The market news hitting my desk this morning is singing “dairy prices have turned the corner”.
This pronouncement is based on double digit percentage increases in dairy commodity prices on the New Zealand based Global Dairy Trade auction platform. What is especially notable are the strong increases in powder prices, which have been the biggest drag on the market for many months. Most likely this is primarily in response to Fonterra’s recent announcement about reduced expectations for production of milk in New Zealand in general and of powder production in particular. In other words, the price jump is likely motivated more as a response to reduced supply than increased demand.
It is premature to confidently conclude that happy days are just around the corner, but I think it is safe to say that the preponderance of market opinion is that the worst is over. Having said that, this is not remotely the same as saying $25 milk is just around that corner we are arguably turning.
If you have checked in on our MPP-Dairy decision tool, you have noticed that the CME-based projections of the MPP margin (ADPM officially), have floated near the $8 mark, dipping below for several weeks but fluttering up and down in conjunction with changes in expectations for the corn and soybean crops more so than milk prices. The chart based on yesterday’s market is here:
This is about the most optimistic that graph has looked in months. The probability distribution around the black line projection still suggests about a 1/3 possibility of margins below $8 in 2016 and a 1/5 probability of margins below $7. Based on these numbers we might say the market outlook is improved but it can qualitatively be thought of as being about average, maybe the high side of average, as opposed to the low side of, or slightly less than average, as we had been seeing earlier.
If you’ve had a chance to check out the new features of the tool, the so-called MPP-Advanced tool, you have discovered the graphic that illustrates our projections of the components of the ADPM. These are displayed below. Keep in mind that this representation only refers to what is the black line in the graph above. It does not contain any information about the probability distribution around each of these numbers.
What this display is suggesting is that when you put it all on a broad scale (0-$25 per cwt of milk), there isn’t that much apparent variation in price expectations over the next year. The actual values in the table are clearly not constant but the range over the marketing year for the feedstuffs is quite tight.
Also keep in mind:
1. All of the feed prices are subject to recalibration as the harvest takes off and eventually concludes.
2. The data displayed above do NOT reflect any great "corner turning" in dairy prices just yet. Everyone will be watching to see if the stronger prices on the GDT start to translate into significantly higher price expectations on the CME and in actual prices reported by AMS over the next couple of months.
Personally, I can’t think of any compelling reasons to expect a great rise in returns to dairy farmers but also no great national disaster either. I suspect the story on returns to dairy will be more personal and regional, hinging quite a bit on the quantity and quality of hay, corn silage, and other feeds harvested around the US.
In other words, if your hay quality was good and your corn silage yields were average or better, you will probably be just fine in 2016. Clearly this is not to say that we are out of the woods just yet as some parts of the country are still very much struggling to figure out what to do with the abundance of milk relative to profitable uses for it. The rise in GDT prices gives hope to getting some help on the demand side of the market.