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Will Low Prices Cure Low Prices?

Published on: 19:26PM Nov 23, 2015

Thanksgiving and Christmas are just around the corner and cheese prices are following their usual pattern. It certainly is not as dramatic as last year, but there is weakness and the trend is down. We can certainly hope there will not be a substantial decline of cheese prices from this already low level. Concern certainly erupted last week when barrel cheese price fell to the lowest level it had been since January 201l. December, January, February Class III futures are trading below $15.00 and set new contract lows last week. Not only these contracts, but Class III futures contract through June set new contract lows.

 

Just how low can we go? This is not a question that many want to entertain, but yet needs to be addressed. Early this year, two contracts fell below $14.00. The March Class III futures contract fell to a low of $13.93 while the April contract fell to $13.56. Block cheese price was trading at $1.47, barrels at $1.46, and butter at $1.55. Currently, cheese prices are trading higher with butter substantially higher. This indicates futures prices should be higher and will remain that way unless spot prices decline considerably. We have seen the trend of cheese prices pointing lower, but that has not been without price bounces as buyers needed to pick up supply to fill orders. However, there price bounces have only been that – bounces. Traders have not been quick to jump into purchasing futures just because of a jump in spot cheese prices.

 

Butter has been the surprise with price earlier setting a new record high and recently holding steady at $2.8850 for two consecutive weeks on the spot market without any trading activity.  Demand has been good with buyers and sellers comfortable at the current price. However, there may be a void developing under the market. A very low bid of $2.48 had been placed in the spot market on Friday indicating that was the closest buyer. History has shown that many times a wild bid or offer shows up during spot trading that many times it is an indicator or where the market might move.

 

So, the outlook through the end of the year does not point to strengthening spot prices which will keep milk prices lower. Current fundamentals are not implying strengthening prices in the foreseeable future however, stability would certainly be welcomed.

 

Global dairy prices remain weak as world supply is plentiful. Our ability to compete in the world market is severely limited due to high prices for cheese and butter limiting export interest. The high U.S. Dollar is another limiting factor and is actually increasing import business with October quota cheese imports 3.2% above last year. It will take some time for exports to improve even if the U.S. and world prices align again. The old saying is low prices will cure low prices and this certainly will be true in this case, but it is difficult to predict how long it will take.

 

One thing that has been evident is that there has been a lack activity as far as price protection is concerned. The idea was that Class III milk prices for later 2015 and all of 2016 were too low at $17.00 leaving hedgers hoping for higher prices after a year of record prices. After closer futures price fell to $16.00, the same idea prevailed with increasing feelings that now futures prices were too low and the market cannot remain this low for very long. Now that futures contracts in closer months have fallen to $15.00 and below, the idea has changed to indicate that now it is too late to do anything. However, the focus should be on later contracts and what can be done to provide some price protection without limiting upside potential. What we do not want to do is see prices return to earlier in the year when futures were in the $13.00 range.

 

I am not recommending forward contracting or selling futures as a marketing strategy at the current time. The preferred strategy is to utilize put option spreads to provide a limit to downside price protection to the level of the sold put option without the risk of margin calls, but yet does not limit upside price potential. This strategy provides a lot of flexibility and peace of mind in a very unstable market.

 

 

Upcoming reports:

 

-October Agricultural Price report on November 30

-California November Classes 4a & 4b prices on December 1

-October Dairy Products report on December 3

-November Federal Order class prices on December 3

 

 

 

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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