January 27, 2020
Robin Schmahl
Much excitement has been generated over the past few weeks as Class III milk futures have been consistently making new contract highs in April through December contracts. Optimism has grown due to the signing of the Phase One trade deal with China, the U.S./Mexico/Canada trade agreement moving forward and a pending minor trade agreement possibility with India. Anything that could improve exports over time is always a positive aspect of the market. The key here is – over time. When a trade agreement is implemented, it does not open the door for increased export business immediately. It takes time to work through the logistics and to develop business relationships. Then, there is the matter of prices and whether the U.S. is competitive on the world market. Trade agreements won’t necessarily open up purchases if prices are not competitive unless maybe a specific variety or quality.
There was much excitement over the signing of the Phase One trade agreement with China. Some reported that it would increase exports of dairy products. However, the list of agricultural products that China was to purchase over the next two years did not include any dairy products. That certainly does not mean they will not purchase any during that time and there is ongoing talks over reducing or eliminating current tariffs on dairy products, but this will take time. Now there is concern over how much impact will be felt over the world and world economies due to the outbreak of the coronavirus. This raises a caution flag over the whole import export market situation to some extent. Imports and exports are a very important element of the world and will not cease, but some economic impact might be felt and the movement of goods might be slowed until this comes under control.
Instead of dwelling on the “possibilities” and the “what ifs”, we need to look at what the current fundamentals are for the dairy industry. A certain level of optimism has risen due to the potential for higher cheese prices due to inventory ending the year lower than the previous year. American cheese inventory was steady to lower much of 2019 compared to the previous month and year. Inventory did not grow as much as usual during the first half of the year and ended the year 7% lower than the previous year. Although milk production slowed during the year, it remained 0.3% above 2018 indicating the possibility of milk output slowing further this year. USDA does not share that sentiment as they estimate an increase of milk output by 3.7 billion pounds over 2019. However, demand has been doing well and the increase of milk production may be readily absorbed.
Even with the potential for higher prices throughout a good portion of 2020 according to the futures market. Prices will be choppy with underlying cash prices fluctuating as business is being accomplished. Periods of high futures prices need to be protected by utilizing options or option strategies or using Dairy Revenue Protection insurance. It is critical to protect milk prices and income over feed.
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