This is cause for concern as we are not an island of ourselves. We are competing on a world market and a balance needs to be found at which business will be done and dairy products will move both domestically and internationally.
One has to wonder how long U.S. cheese and butter prices can remain substantially above world prices. Much of 2014, Global Dairy Trade overall weighted average prices declined while U.S prices increased and held at record prices. But a large correction eventually took place at the end of the year with U.S. milk prices falling over $9.00 per cwt. Not all of that correction was the result of the difference in prices, but it definitely had a large impact. Previous export contracts were satisfied with new export business and contracts difficult to achieve. Domestic milk production was strong exceeding the previous year allowing for supply to build.
There has been good demand with manufacturers wanting to build plant inventories and buyers looking to increase ownership early rather than waiting until mid-year to purchase for later demand. The industry was looking over their shoulders and did not want a repeat of last year. It seemed as if the prevailing idea was to produce or purchase as much as possible in order to have enough product on hand for expected upcoming demand and then some creating almost a hoarding mentality. This is why lower exports have not had a very large impact on cheese and butter prices. The market really did not care. If supply continues to build and demand is satisfied, lower prices will be required to clear product.
Current price seen on the Global Dairy Trade action are lower than they were a year ago with the average price declining eight consecutive trading sessions after a brief price rally. I fear prices may weaken as the third quarter of the year unfolds. We have already seen cheese prices trend lower when normally we would see them trend higher. Plant inventories are full with other inventories growing. Cheese price has fallen back to the level last seen in mid-May.
On the other hand, butter has been able to hold well despite a substantial increase of inventory and a substantial decline of exports. In fact, current butter inventory is at the highest level since July 2013.
This is cause for concern as we are not an island of ourselves. We are competing on a world market and a balance needs to be found at which business will be done and dairy products will move both domestically and internationally. Unfortunately, current markets lend themselves toward a trend of lower prices during the second half of the year. I know this is not good news and I do not intend to depress anyone, but unless we see a change in current market fundamentals lower prices may become a reality. Milk futures contracts have already adjusted to some degree with most contracts through the second half of the year already declining $1.00-$1.60 lower than they had been about a month ago.
Those who have followed my previous recommendations already have fence positions established. Those who have been waiting for a seasonal price rally can still initiate position at lower strike prices to initiate the spreads for the last quarter of the year. Establishing a floor at $16.50 with an upside of $18.00 provides good risk management for a portion of your milk production.
- World Agricultural Supply and Demand report on July 10
- June Milk Production report on July 21
- June Cold Storage report on July 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 www.agdairy.com.
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