Dairy markets certainly have shown some volatility as well as some stability since the beginning of the year. There was an extended period of time during which cheese and butter prices remained within a narrow trading range leaving much to be desired for those who wanted to hedge profitable prices later in the year. There was a seasonality of higher milk prices factored in future contracts, but those prices did not reflect much optimism especially in light of last year’s prices.
However, even during times of minimal price movement of the underlying cash, futures did show significant volatility. Perceptions changed as Global Dairy Trade auction prices increased early in the year taking closer month Class III contracts from prices in the mid-$13.00 range back up over $16.00 in a short period of time. Increasing cash price after a period of stability caused short-covering propelling futures higher about a half dozen times since mid-January. Price premium was added to contracts in anticipation of further cheese and butter price increases. Then, when cash prices did not follow through, the extra premium was again removed resulting in the falling back of futures prices.
With all of this price movement it would lend itself to the idea that milk prices should be stronger than they currently are. After all, block cheese price has reached the highest level since December 3, 2014; barrel price reached the highest level since November 25, 2014; and butter price reached the highest level since October 16, 2014. However, milk prices have been relatively stable throughout this year.
So why has the Class III price only ranged 72 cents during the first 4 months of the year? Much of it had to do with the price of dry whey. At the beginning of the year, dry whey price was $0.5866 per pound according to the weekly Agricultural Market Service (AMS) price survey. The current dry whey price is $0.4542 per pound. The difference is $0.1324. The decline of dry whey price correlates to a decline in the Class III price of $0.7944 per cwt. (each penny move in dry whey equates to a 6-cent move in Class III price). That is why the underlying cash calculation of the components making up the Class III price has remained nearly sideways despite the increase of cheese prices. On a daily basis, Class III was calculated at $16.06 on January 2 and the daily calculation on May 21 was $16.18. Since the beginning of the year, block cheese price has increased 7.50 cents, barrels have increased 7.75 cents, and butter has increased 37.50 cents per pound.
Class IV price has not faired quite as well as Class III. It has ranged 57 cents during the first 4 months even with butter price reaching $2.06. The reason was the weakness of nonfat dry milk price. Butter and nonfat dry milk powder are the main drivers of Class IV price. Again, butter price has increased 37.50 cents since the beginning of the year while nonfat dry milk price has declined 8.50 cents on the daily spot market, but has declined 21.41 cents on the weekly AMS survey. The result has been a decline of 27 cents per cwt on a daily price calculation from January 2 until May 21.
This is the most stability of the underlying price calculations that I have seen in quite some time and the way fundamentals are shaping up, it may remain this way for a longer period of time.
-Agricultural Prices report on May 28
-California Class 2 and 3 prices on June 1
-California May Class 4a & 4b prices on June 1
-April Dairy products report on June 3
-May Federal Order class prices on June 3
-Hay final acreage and production for 2008-2012 report on June 4
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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