Milk Supply Tightens, But Will It Be Enough?

Published on: 16:10PM Aug 06, 2010

By Robin Schmahl, AgDairy LLC


For some time now, trading activity on the spot market has been very limited. Prices have moved many times by unfilled bids or offers. Fortunately, unfilled bids or limited trading has been supporting prices. Milk prices for August and September look promising. Slight declines are seen for November and December, but still relatively good prices compared to 2009.


The concern is that 2011 contracts continue to side lower even though cheese and butter prices are strong. In fact, Class III futures contracts for the first quarter of 2001 have fallen around 20¢ since cheese prices began rallying at the end of June.


Traders view the present market strength to be a combination of lower components, hot weather reducing milk production, and milk beginning to move to the Southeast for bottling to fill the school pipeline. Milk will moved to that region because it is a deficit area, but all areas of the country will be bottling more milk for schools. This will decrease the volume of milk available for manufacturing cheese, butter and other products. The available supply will tighten, but will it tighten enough to cause cheese and butter prices to continue to rise?


Cheese inventory is high and the highest it has been since the mid-1980. This is a factor to be reckoned with and will limit buying for aging programs. However, fresh cheese is carrying the ball, and enough demand for it will keep prices higher. Inventory should decline during the second half of the year as demand ramps up for cheese, causing suppliers to reach back into inventory to supplement orders. The weekly cold storage reports suggest otherwise as stocks in these selected warehouses during July indicated a slight increase for both cheese and butter.


CME Group’s recently introduced cheese futures contract is showing some good promise. Trading has been somewhat steady, but certainly nothing to write home about. Current open interest is 206 contracts with trading activity taking place most days.


A new market always takes time. Eventually, open interest and trading activity will increase. This contract adds another indicator to the toolbox for getting a feel for the market. Current futures show slight increases in cheese prices for the next two years, with the highest price being listed in July 2012 at $1.70. The trade presently does not think cheese futures need to hold much price premium, with a wait-and-see attitude being exhibited. Active trading in cheese futures has so far been confined to contracts out to the end of 2011, with prices in 2012 just being posted prices. Of course, these are futures contracts and a lot can change over the next two years.


Global markets are mostly steady, other than the evidence of weakness seen in Fonterra’s monthly auctions. The latest auction resulted in price decreases of 7.7% for whole milk powder, skim milk power price declined 8.9%, and anhydrous milkfat fell 7.6%. This may not seem like much, but the fact that whole milk powder and skim milk powder have fallen 25% since April while anhydrous milkfat has declined 19% over the past two months speaks volumes. Domestic nonfat dry milk supplies are growing, sending regional prices lower on an almost weekly basis.


My current marketing recommendation is to purchase put options on corn you expect to harvest for feed and any that you will be selling after harvest. The purpose of purchasing put options on corn that you will be harvesting for feed is simply to protect the value of the crop. These put options can then be lifted once harvest is complete and corn silage is chopped.


The recent run-up in corn price was largely due to spillover from the surge in wheat. There is some real risk to the downside for corn price. Protecting the higher value of your crop is a good marketing strategy. I realize those farmers who are in the South may already be harvesting or done harvesting, but the recent price increase bears taking a look at for those who have yet to harvest.


Upcoming reports:

-          California Class I price on August 10

-          World Agricultural Supply and Demand report on August 12

-          Fluid milk sales on August 13

-          July milk production report on August 18

-          Livestock, Dairy, and Poultry report on August 18

-          September federal order Class I price on August 20

-          Livestock Slaughter report on August 20

-          July Cold Storage report on August 20



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 website at


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 my not be suitable for everyone. Those acting on this information are responsible for their own actions.