April Showers Bring May Flowers for the Milk Market

Published on: 14:32PM May 19, 2012

Can the recent rally be sustained given the underlying fundamental picture? Are you protected if prices head south again?

Rocky GinggBy Rocky Gingg, Stewart-Peterson

Milk prices have made a sharp turnaround over the last two weeks, putting an end to a lengthy five-week losing streak. During the past two weeks, June milk rallied over 120 cents, or 8.6%, while the July-December average has tacked on more than 50 cents, or 3.7%.

Has April’s steady shower of downward pressure led to an upward blossom for milk prices in May? Thus far it has, but the better questions to ask are, “Can the rally be sustained given the underlying fundamental picture” and “Are you protected if prices head south again?”  

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Source: Stewart-Peterson Inc.

Analyzing the Latest Market Fundamentals

In the latest USDA Milk Production Report for the month of April, total milk production came in at 17,190 million pounds, up 3.2% from last year but down 2.8% from March. This is the largest year-over-year percent increase for April milk production since the 3.3% gain in 2006. The herd grew another 5,000 head from March and was up 90,000 head from last year. Productivity per cow took a seasonal dip and was down 55 pounds from March but up 40 pounds from last year.
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Source: Stewart-Peterson Inc.
On the demand side of the equation, U.S. dairy exports have proven to be the silver lining amidst the excess supply flowing through the pipelines. According to trade data released on May 10, total U.S. dairy exports for the month of March were up 4.7% from last year. March marked the fifth consecutive month with a year-over-year gain for total dairy exports. Total cheese exports posted a record high at 25,087 metric tons which was up 13% from last year and 22% from the previous month. Year-to-date exports have accounted for 12.9% of total milk solids.
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Source: Stewart-Peterson Inc.
Milk Marketing Strategy in a Down Trending Market 
Given the overall bearish fundamental backdrop, rallies such as this are great opportunities to make incremental sales or implement option coverage. Using upside price targets above the market or downside sell stops beneath the market are both great ways to reward the rally and get coverage in place.
• An upside price target is more aggressive and should be derived from key retracement levels or key resistance areas. “Retracement levels” measure how much prices have rallied from contract lows to contract highs. “Resistance areas” are price levels where the market has struggled to reach above.

• If a producer wants to roll the dice, a downside stop allows the market to trend higher and ensures protection if prices turn around, because the sell stop will be triggered on the way down.
From a big-picture standpoint, we are still in a down trending market. Rallies in a down trending market can be very short-lived and producers should take advantage of them as hedging opportunities. This is preferable to crossing your fingers and hoping the short-term bottom is in.
“Fool me once, shame on you. . .”
Right now the market seems to be trending in a two-step down, one-step up fashion. That means the overall trend is down. We see, however, a rally occasionally that offers opportunity. Producers should be cautious about getting caught in a “fool me once, shame on you; fool me twice ,shame on me” marketing scenario. Every time we let a rally go by, we miss a pricing opportunity and end up in “woulda coulda shoulda” territory.
That’s why we stress the importance of a vigilant, consistent marketing approach that aims to build a strong weighted average price over time. When you take this approach, you take the decision-making pressure off of each individual rally, and instead use each rally as a stepping stone to a solid overall price for the year.
Rocky Gingg is a Market360® Advisor for Stewart-Peterson Inc. He can be reached by calling 800.334.9779 or at [email protected].

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