Do Milk Prices Need to Remain High?
July 14, 2022
The past month has not been kind to milk futures and if current levels hold, milk checks will be significantly lower than they were projected to be a month ago. Trader’s attitudes have changed over the past month moving from bullish to bearish. Now we must remember that dairy futures are not the price discovery mechanism as you see in some other commodity contracts. Daily spot trading is the price discovery mechanism and trading either follows or anticipates where final prices will be. However, trader’s attitudes will play a large role in the volatility and psychology of daily trading. For much of the first five months of this year, there was an element of bullishness in the market. Cow numbers were declining, milk production was decreasing, costs of production were rising, and demand was holding well. Record milk prices were seen for all classes of milk. Forecasts were released that milk prices were going to reach $30.00 per cwt.
However, that attitude changed over the past month as the industry saw that reduced milk production did not tighten supply with inventory of dairy products actually increasing. Cheese prices weakened with any bounce of price on the daily spot market being short-lived. Prior to early June, stability in spot prices or sometimes even a decline resulted in traders buying aggressively into the market because price weakness was short-lived and lower prices were buying opportunities for increasing ownership of the physical supply. As time progressed, food and fuel increased substantially due to inflation. Supplies and end users of dairy products had been purchasing product throughout the early part of the year in order to make sure they had ownership of sufficient supply for later demand. Thus, suppliers and end users already had quite a bit more on hand by the beginning of summer. Demand began to slow in many areas for manufactured goods and food. Restaurant traffic began to decline. With the potential of a recession, buyers of cheese are uncertain how much product will be needed to supply both retail and the food service industry with dairy products. With higher-than-normal supplies already purchased ahead, they may have overbought for this time of year and are now holding back waiting to see the level of demand during the second half of the year.
The statements that continue to surface in discussions is that people need to eat and milk prices have to remain high or farms will go out of business. There are both logical thoughts and have merit. Yes, people need to eat, but they may change their eating habits and what they eat. Instead of purchasing two pounds of cheese each week, they may only purchase one. Instead of purchasing stuffed crust pizza, they may purchase regular pizza. Instead of purchasing higher end cuts of meat, they will purchase hamburger, etc. The point is that people will adjust and demand in some areas will decrease. As far as the statement that milk prices have to remain high or farms will go out of business may be correct, but in reality, the market does not care whether a farm remains in business or not. The market runs on supply and demand and if demand slows, supply may increase, and prices decline. The opposite is also true. It is up to each operatiuon to manage the risk that is ever present in the market.
Feed prices have increased substantially from a year ago and even six months ago. This has attributed to the rise in the cost of production. Those who raise most of their feed for their farms have been in a much better position than those who purchase a significant portion of their feed. Unless the farm had forward contracted feed or this year at some point last year, buying on an as-needed basis has been difficult. There have been some instances in which feed had been forward contacted but the feed has not always been available due to delivery problems with both truck and rail putting producers in a difficult position. Even with increasing feed prices, milk prices have so far been able to compensate when just looking at income over feed. The May income over feed price was $12.52. This is calculated by using the average price of corn, soybean meal and premium/supreme hay compared to the All-milk price. The May price was the highest income over feed seen since the Dairy Margin Coverage and previously the Margin Protection Program was initiated in 2015.
Even though income over feed suggest profitability, there are many other costs that have risen making it not as positive as it looks. The second half of the year may see price fluctuations that will be both positive and negative to the dairy operation. The goal should be to take advantage of these fluctuations and protect prices.
Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
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