Can Higher Prices be Maintained?
Jun 06, 2016
Milk futures have moved slowly higher since mid-May improving the outlook for dairy prices to some extent. Much of this underlying strength seems to be coming from the seasonality of price movement. Many years, buyers become more aggressive and prices increase during May and June. There is the desire to gain ownership of dairy products at what typically may be the lower prices of the year. Buyer interest continues to move price higher as they become more aggressive a procuring supply before prices escalate. Current fundamentals do not suggest a tightening supply or a concern of milk production declining substantially in the foreseeable future. However, buyers would rather purchase now at current prices rather than purchase cheese or butter 10, 20, or 30 cents higher than where they presently are. This is good business. The good aspect of this is that it is likely the bottom has been established in the market. Yes, we can get excited that prices have moved off their lows, buy they certainly have a long way to go. After all, the recently announced Class III price of $12.74 is the lowest price since September 2009.
Other than seasonality, two consecutive trade weighted average price increases on the Global Dairy Trade auction may also have provided some support. However, that may not provide very much support as the pattern over the past year has been a few times of increases followed by a few times of decreases. Traders are viewing this with caution, but a trend has to begin somewhere and sometime.
World dairy market fundamentals are beginning to show some positive numbers, but this may not change world prices very quickly. Milk production in Europe posted a 5.6% gain for the first three months of this year, but has been slowing since then while at the same time demand is improving. New Zealand milk production in April declined 2.5% with Australian production down 2.7%. Milk production in the United Kingdom during the month of May was down 3.7% from last year. How quickly this will translate into higher dairy prices is hard to predict, but it is moving in the right direction. Current heavy world supplies with need to be reduced to support continued higher prices.
Exports continue to suffer and may keep a lid on a sustained higher trend of dairy prices. April exports did not fair well with the exception of Whole milk powder which jumped 74% from last year. Cheese exports fell 33%; butter was down 44%; whey declined 13%; nonfat dry milk/skim milk powder declined 19%; and fluid milk exports were 23% lower then a year ago. The total value of exports was $366.7 million, down 31% from April 2015. So despite the recent spot and futures price increases, this remains a troubling trend and one that will need to be rectified before higher prices will be able to be maintained and improved. However, anything better than May milk prices is to be considered a blessing.
Some support may be coming from higher grain prices. Those have certainly been a surprise over the past two months. Support to the grain complex has stemmed from an explosive soybean meal market. July soybean meal futures have increased about $150 per ton since the low was set on April 7. This have driven soybean futures and to a lesser extent corn futures. This movement has reduced income over feed cost substantially. Under the Margin Protection Program, the calculation for the income over feed cost for April was $6.83 and the lowest since the program began. The two-month average income over feed cost was $7.15 rendering payment to those who chose the $8.00 level as well as the $7.50 level. Higher milk prices generally are a result of higher grain prices.
-World Agricultural Supply and Demand report on June 10
-May Milk Production report on June 21
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 www.agdairy.com.
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