By Robin Schmahl
The cycle of low milk prices has again returned. This is shown by the Class III futures contracts for 2009. Next year will be a time to tighten our belts again. Milk prices will be below almost everyone’s cost of production, similar to how it was in 2000, 2002, and 2006.
The average base milk price in 2000 was $9.78 and the average in 2002 was $10.42. In 2006 the average 2006 was $11.89 and the average for 2009 is currently at $14.19 per cwt. Most contracts for the first half of the year are trading below $14.00. There is some anticipation that Class III price will drop below $13.00 before it is all said and done. Earlier this summer there was an estimate released that suggested the milk price would cycle back up to high prices by late next year. However, that idea has since been abandoned due to the impact of the financial markets on potential demand.
Economic times such as how have not bee seen in quite some time. The deflationary cycle is feeding on itself and it is unclear what it will take to break that cycle. We are treading in new territory of which none of us can anticipate what will happen next. Now is the time of year when consumer buying is typically at its peak.
Dairy prices have been falling in most cases despite the strong cheese prices. At least this is extending the duration of time that better milk prices will be received. Dry whey price has fallen to 18 cents per pound; nonfat dry milk price is at 87 cents (with powder being sold to the CCC almost on a daily basis); and butter has dropped into the $1.20s. The November Class III price was announced at $15.51 per cwt. and even though it is a decrease of $1.55 from October, the price is still not too bad. If the current cheese prices are maintained for another two weeks, the December price will not be too bad either. There real concern is over prices for next year. The Holidays will be over and a period of slower demand will be upon us.
During the past two years the seasonality of the market has changed. Buyers are willing to purchase cheese during the early part of the year and pay the extra storage. Waiting became too costly as they chased the market higher in the summer and fall, many times paying more for cheese or butter than they wanted. Recently, buyers became more aggressive pushing cheese and milk prices to record highs during spring flush.
It is likely this will change again in the upcoming year due to the tight credit and the unwillingness to hold product any longer than necessary. Buying will be done only when necessary unless they feel prices are low enough to be attractive to build some cushion for later demand. Manufacturers will limit production to orders rather than keep plants full and then market the manufactured products. Once all holiday orders are filled, I anticipate the cheese market to decline quickly and significantly. It is likely cheese prices will fall below $1.60 with a possibility of falling below $1.50 before it is over. This is the cold, hard reality.
On the bright side, the November milk/feed ratio improved, posting a ratio of 2.13. This is the best it has been since February. The fact that feed prices have dropped faster than milk prices is a blessing. This may not last indefinitely and these low prices are prompting us to sit up and take notice. The recommendation is to set target prices for feed purchases for next year. Grain markets are weak, but prices may be near the bottom, and once that is evident end-users will step up and buy for the upcoming year pushing grain prices higher. You do not want to be caught with increasing feed costs and low milk prices.
Upcoming reports to watch for are the World Agricultural Supply and demand report on December 11; the Crop Production report on December 11; the November Monthly Milk Production report on December 18; The November Livestock, Dairy, and Poultry Monthly report on December 18; and the November Monthly Cold Storage report on December 22.
--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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