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Cash Has Limited Influence on Milk Futures

The outlook for milk prices just is not getting any better. There had been some anticipation milk supply might begin to tighten over time after the December Milk Production report showed cow numbers declining, indicating culling could be increasing. Some strength came into the spot markets and traders bought milk futures for a brief period of time until spot prices faded again. However, the January production report showed the opposite, dashing hopes on a sooner price recovery. The market will need to prove itself before traders will be interested in buying contracts for the long term. Currently, they are scalping the market taking short term positions and liquidating when there is a slight profit if it materializes.

Traders are neither overly long or overly short in the market, leaving no substantial price movements when underlying cash fluctuates. That has been the pattern for quite some time and futures prices now move less than they had in response to fluctuations of underlying cash. Last week was a prime example of the current attitude and trading activity in the market. For the week, block cheese price increased 7 cents with barrels up 3 1/2 cents, yet April Class III milk futures declined 3 cents, May Class III futures declined 32 cents, and June futures were down 31 cents for the week. Futures should have been significantly higher, but traders are accustomed to price increases being short lived. Eventually, this mood will be broken, but it will take a significant fundamental event or a dramatic change in attitude.

Record dairy exports and cheese inventories are currently below a year-ago levels and have not been enough to support the market or tighten supplies. Dairy cattle slaughter in January totaled 297,900 head and was the highest monthly slaughter since March 2021 and the largest January slaughter in 35 years. This indicates that there had been a lot of replacements ready to enter the milking herd as overall cow numbers increased 9,000 head from December to January. The question raised is whether December or January slaughter numbers were an aberration. This question may be answered more clearly when February slaughter numbers are released. Nevertheless, milk production continues to outpace last year.

One event that has gained much prominence in the dairy industry is the world has been the Global Dairy Trade (GDT) auction. It has risen in prominence since its beginning in July 2008. The auction was launched by Fonterra, a large dairy company based in New Zealand. The ownership of the GDT is now shared by Fonterra, the European Energy Exchange and the New Zealand Stock Exchange. This is expected to enhance the credibility of the auction and provide greater presence in major international dairy regions. Most of the trading activity and volume is in Whole milk powder and Skim milk powder. This auction takes place twice monthly on the first and third Tuesdays. It provides a world view of where dairy prices are headed and carries a close similarity to U.S. price direction. (See chart below)

On a different topic, one thing that has really stood out over the last number of years is a certain level of disinterest by not only dairy farmers, but farmers in general over risk management. There are those who have embraced it as a necessary part of the farm business and are proactive with price protection. There are many who continue to focus on the many other aspects of the dairy operation such as increasing milk production, improving cow comfort, increasing forage production and quality, embracing technology to improve efficiency with the goal of increasing milk production.

Grain farmers focus on better soil nutrients, planting technology, and seed selection to increase bushels per acre. Livestock producers strive for increased weight gain, better genetics, and better feed efficiency. Yet, there is a disinterest or maybe fear of protecting prices of the end product leaving the income of the farming operation and the livelihood of the families involved open to the fluctuations of the market. The risk could be negative cash flow sometimes for extended periods of time. Farmer meetings that include topics on risk management are difficult to find. Meetings that focus on risk management by using crop insurance, revenue insurance, market outlooks and futures and option strategies seem to have little or no interest. Risk management is as important as any other aspect of the farming operation and sometimes it can be more important as it protects income. Choosing not to be involved in risk management is putting your farm and your livelihood at risk. Please call us if you want to learn more and do more.

March 8, 2023


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