Market Watch Diary: Milk Price: Downside, Upside

Market Watch Diary: Milk Price: Downside, Upside

You endured sharply lower milk prices during the first quarter and still lower prices are forecast for this quarter. Then, there is some upside—unless my forecast is correct and others are wrong.

JerryDryer blue
Jerry Dryer is the editor of Dairy & Food Market Analyst.

That is the sum and substance of my analysis of several forecasts as of mid-March. The results, to be reported here, are based on my review of forecasts from USDA, Rabobank, a poll of six dairy economists that

I conduct each month and my monthly forecast. I took the most recent of each forecast and, where necessary, calculated quarterly averages which are presented in the chart to the right. Following are my observations.

First, let’s take a look at the high and low quarterly averages for the year.  I’m undeniably the biggest bear among the forecasters. My take: the Class III milk price bottoming out at $13.83 during the third quarter.
All other forecasters have the low being put in during the second quarter. Rabobank is the lowest of the lows during the second quarter at $14.18.

On the high side, USDA is expecting a $17.30 average price during the fourth quarter. This is the mid-point of the farm agency’s forecast. In fact, USDA says the Class III price could average as much as $17.80 from October through December.

There is an outlier that doesn’t show up in the chart. One of the six economists that I survey has the highest number. This forecaster says the Class III price will average $18.43 during the fourth quarter. The chart in the right corner reports the quarterly averages for all six forecasters.

Rabobank and I share the low point of the second quarter. But Rabobank’s outlook (like the others) turns upward in each of the subsequent quarters. My price outlook continues to tumble into the third quarter. Please let me explain my bearishness.

There was significant inventory re-building during the first quarter and further building (not simply re-building) will continue through the entire second quarter both here in the U.S. and in Europe. Fonterra has enough stocks to fill its orders through the low part of New Zealand’s milk production season and maybe some cushion.

This inventory re-building by end-users has actually supported prices during the first three months of this year. With milk production increasing seasonally here and in Europe, stocks will now build further as supply clearing exceeds demand. With milk production quotas gone in Europe, milk output will get an extra bump up.

This, coupled with less than stellar demand from China and oil producing regions of the world, will translate in lower third quarter prices in my opinion. As a consequence, you may need to endure a few additional months of sub-$15 Class III milk. Let’s hope I’m wrong.

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Joe the Milkman
4/1/2015 04:27 PM

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