Surprising strength has unfolded in the butter market recently pushing price to the highest level in about a month. Strong end of the year product movement apparently was good resulting in retailers returning to the market to restock shelves. Food service orders have slowed with manufacturers putting more emphasis on bulk production. This surge of butter price has improved the outlook for Class IV prices. It has had an impact on Class III prices as well, but the price impact has been minimal compared to what it has been to Class IV. However, the psychological support has been impressive with February Class III futures rebounding about $1.00 from its low set on January 6. March has not been the recipient of quite as much of an increase, but it has still been an impressive 60 cents. Later futures contracts have not shown as much strength, but have also increased. It seems that there has been a sort of looking back to last year and what took place during this time of year. Market sentiment at this time last year was bearish with futures prices falling well below the underlying cash correlation. March, April, and May 2015 contracts briefly fell below $14.00 in January only to rebound nearly $2.00. This may be providing some historical impact on the market as traders think this could be a similar pattern. Futures prices last year were at a discount to the underlying cash while futures now carry a premium. Current fundamentals are different than they were a year ago and have not changed much from the end of 2015. We must be careful as a repeat of last year may not become a reality.
Dairy farmers are always happiest when milk futures post positive prices and rightly so. No one likes to see their potential income dwindle. Recent improvements in butter and, to a lesser extent, cheese prices certainly makes one feel better. The important thing to remember is that it is too early to believe that the trend of the market has changed and the lows are again behind us. It is too early to tell whether the lows have been established for product prices and milk prices.
I follow weekly cold storage reports which USDA releases from selected surveyed warehouses on Wednesdays each week. The warehouses they survey are the same each week to give an indication of what is happening during the month while the monthly storage report, released later in the following month, shows what is stored in all warehouses for that month. The weekly storage reports are not completely accurate as they are just a sampling of the whole. The pounds and percentage of increase or decrease can vary as a result. It does, however, provide an idea of whether supply may be increasing or decreasing during any given month. The recent weekly cold storage report for the first 11 days of January showed a slight decrease of one million pounds of cheese or one percent while butter inventory jumped 2 million pounds or 26%. Reports in the country have been indicating butter production is meeting demand with extra moving into inventory. This confirms those reports. So why is butter price increasing so much? Supply is not short, but buyers have been aggressively trying to obtain product to fill orders.
If weekly storage reports are a barometer of inventory levels and with inventory closing 2015 at higher levels than that of 2014, then we must realize that there is sufficient price risk this year. We cannot turn the clock back to a time of higher milk futures prices, but we can look for opportunities that are given to us for managing price risk. Last year was not a great year, but yet a good year. We certainly do not want to have 2016 be a devastating year during which the only thing we have to look forward to is decreasing equity. Recent increasing futures prices may provide opportunities for price protection. You need to determine how much to protect and how to protect it.
-Global Dairy Trade auction on January 19
-December Livestock Slaughter report on January 21
-December Milk Production report on January 22
-December Cold Storage report on January 22
-December Agricultural Price report on January 29
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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