Are Current Milk Prices Too Low?
There has been a significant amount of discussion recently that current milk prices are too low and that they must increase or no one will be able to continue dairying. Of course, these are the comments from farmers as they see and will be seeing lower milk checks. Some expenses have declined, but overall expenses remain high. Lower fuel, fertilizer, etc., is being offset by increased labor costs and other areas. Many times it seems that all that is accomplished is just trading dollars for dollars.
Milk pricing has a lot of moving parts, and when most of these parts are bullish, milk prices will move higher. The same is true when most of the parts are bearish, milk prices will move lower. The bottom line being supply and demand. Currently, supply is not bearish, but sufficient for current demand.
Underlying cash prices have been in a decline for various durations of time depending on the category. This trend has not yet changed. There have been times of higher prices for brief periods of time, but they have not been sustained. Buyers of the physical commodity have not felt the need to purchase very aggressively due to supply being readily available. This is likely to continue until buyers feel the need to increase ownership due to the potential for a tighter supply. This potential may stem from a significant increase in culling. In the Fall of 2021, culling increased significantly with cow numbers declining from month to month into the first quarter of 2022. That set in motion the idea that milk supply was going to tighten resulting in record high milk prices. That will be watched closely again this year.
December had a surprising decline of 8,000 head from November. The January Milk Production report will indicate whether this is the beginning of a trend again. What took place last time there was heavy culling is still fresh on everyone’s mind. It may not be that heavier culling will tighten milk supply, but it will be the perception that it will is what will drive the market. It will cause buyers to step up aggressively to purchase for storage earlier rather than later.
The other aspect will be demand. Consumers will need to maintain a strong interest in purchasing dairy products. The bottom line is that demand needs to be better than it has been. Even though domestic demand has been considered good with export demand setting a new record last year, it has not been enough to keep dairy prices at higher levels. Yes, normally this is the time of year during which demand is generally slower and we are following that trend. However, the current low prices have not spurred heavy buyer interest to any great degree.
The indicator we use for milk prices is the daily spot market. It is representative of what is taking place out in the country. There has been some good activity on the spot market which indicates good demand as it is a market that is used as a place to come to purchase supply when it is unable to be purchased through regular channels and a place to sell when it is difficult to sell through regular channels. That is what makes it representative of the market. Some days, no business is done as no one needs to buy or sell. Sometimes price moves even though no business has been done due to the aggressiveness of either the buyer or seller. It is a very interesting market to watch to get an idea of supply and demand. Contrary to what some might think, it is not a manipulated market. Buyers and sellers on the spot market do not know who each other is until after the transaction. Price manipulations that at one time took place in the distant past are a thing of the past. The market is an efficient market representative of supply and demand.
February 22, 2023