Milk Prices Continue to Remain Strong

Published on: 11:22AM Oct 28, 2013

But how will time-of-year decisions, international demand, dairy product inventories and feed prices affect the months ahead?

Now that the flow of information and reports from the USDA have resumed, both traders and the industry are breathing a sign of relief. There was a sense of the unknown with the lack of information. This is not to say that reports from the USDA are completely accurate, but are putting forth information received from surveys that have been consistent for many years.

Without this flow of information, market analysis was left up to anyone following the industry who had an opinion. Some "backyard" information was presented as the pattern for the country. Any information was scooped up, regurgitated, re-worded and released to those looking for information for decision-making. There was nothing inherently wrong with this as some of this is done anyway when news is sparse. Interestingly, much of this news had little impact on the futures market. Futures contracts traded mostly in line with underlying cash prices and rightly so. That was concrete evidence of what was actually taking place in the country.

The first monthly report that came out of the silence of USDA was the August "Dairy Products" report that had been delayed since Oct. 3. This report showed significant growth in dairy product production and was considered somewhat bearish. Despite hot weather and reduced milk production, more cheese and butter was produced than last year. Total cheese production reached 926 million pounds, up 3.9% over last year. American cheese production totaled 381 million pounds, up 7.9%. Italian type cheese production totaled 386 million pounds, up 3.8% over last year. Butter production in August totaled 136 million pounds, up 4.7% above last year. This certainly was a bearish report from the standpoint of increasing supply. However, this does indicate good demand.

During October, cheese prices have slowly increased improving the outlook through the end of the year. Current cheese prices are a few cents higher than they were in mid-September, which has been somewhat surprising considering the price decline into early October. However, on-hand supplies have dwindled, requiring them to step back into the spot market more aggressively to fill orders. There is sufficient cheese supply available to the market as a whole, with inventories above a year ago; however, demand for fresh cheese is driving the market. Once the needs of buyers are met, there is a possibility of a void under the market and a potential quick decline in price. Time of year may play a large role in lower prices.

Improving international demand has certainly been very supportive to prices. Even though New Zealand’s milk production is running about 5% above last year, world prices have been somewhat steady. U.S. prices have been competitive, bringing increased business to our shores.

My current marketing recommendations consist of fence strategies for the first half of 2014. Purchase the $16.50 put options and sell $18.00 call options for 20-45 cents. Option strike prices may be adjusted to match the premium one is willing to pay as well as the floor price to be protected. Lower grain prices increases the risk of lower milk prices once holiday and end-of-the-year demand is satisfied. There is too much at stake to do nothing.

Upcoming reports:

- September Cold Storage report on Oct. 31
- September Livestock Slaughter report on Oct. 31
- Agricultural Price report on Oct. 31
- September Milk production report on Nov. 1
- Global Dairy Trade auction on Nov. 5
- World Agricultural Supply and Demand report on Nov. 8

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

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