Nonfat Dry Milk Leads the Way

Published on: 12:29PM Feb 07, 2011

A tight powder market-- with increasing international demand and prices -- has been driving the dairy complex higher. Nonfat dry milk will be the key to milk price potential.

It certainly has been a wild ride since the beginning of the year. It seems almost as if the market made a New Year’s resolution to move higher and the resolve is still there. Cheese and nonfat dry milk (NFDM) prices have been increasing almost daily, pushing futures right along with them. The only laggard has been butter, which made a large jump the first few days of the year but has remained at the present $2.10 for a month.
It certainly is exciting to see the potential to receive over $18.00 for Class III milk and over $19.00 for Class IV milk beginning in March. A tight powder market-- with increasing international demand and prices -- has been leading the dairy complex higher. The NFDM price has increased 45 cents/lb. since the beginning of the year, pulling cheese prices up 47 cent/lb.
Cheese prices had to keep pace with NFDMin order to remain competitive. Too much of a price disparity shifts more milk over to butter/powder production, leaving cheese manufacturers short of desired volume. To remain competitive, cheese prices had to increase. Buyers of cheese have been aggressive in their attempt to purchase cheese for inventory as well as immediate orders. However, they have had a difficult time shaking any loose. There has been very little spot market activity the past few weeks. Sellers are holding back waiting for higher prices and allowing prices to keep pace with NFDM.
Nonfat will be the key to milk price potential. If price ceases to increase, cheese prices most likely will stabilize as well. The fundamentals in the cheese market do not suggest prices should be as high as they are. Inventory is large, milk production continues to increase, and reports are there is sufficient cheese to meet demand. This is normally a slower demand period of the year with more products moving to inventory. This year should not be an exception, with USDA’s weekly inventory reports indicating cheese stocks have increased moderately during January.
Late last year, fundamentals pointed to a slow recovery of milk prices during the first half of 2011, with stronger prices expected during the second half. Heavier culling was expected early this year, eventually leading to a tightening milk market. However, that thought seems to be changing as these high futures prices are already spurring the thought of adding cows to boost milk production. Yes, feed prices still remain high and possibly will increase further, but milk futures have jumped dramatically.
Cull cow prices have been good and culling rates higher, which would indicate some difficulty in the availability of replacement and the desire to add more cows. However, the latest bi-annual cattle inventory report showed 50.5% heifers to cows and the highest ratio since my records back to 1993. So, even with higher culling rates, there are plenty of heifers waiting in the wings. This may change the landscape with a potential of lower prices again coming during the second half of the year.
It is easy to be caught up in the euphoria of the moment and rising futures. However, marketing is just as important and maybe a bit easier due to prices that are now above most operations’ cost of production. I recommend purchasing put options for the months above $18.00 and using fence positions for later months, striving for a $2.00 spread between the put and call. Do not go overboard, but doing up to 25% of your production is advisable.
LGM Dairy is another tool to be used in conjunction with marketing. It is an insurance policy protecting the gross margin of milk and feed. It protects the margin of the two, but does not protect against lower milk price in itself.
Upcoming reports:
-                      The World Agricultural Supply and Demand report on Feb. 9
-                      California Class I price on Feb. 10
-                      Fluid milk sales on Feb. 11
-                      Fonterra auction on Feb. 15
-                      March Class I price on Feb. 18
-                      January Milk Production report on Feb. 18
-                      January Cold Storage report on Feb. 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 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.