Extreme Market Volatility is Becoming Normal
Dairy markets are very unpredictable heading into the end of the year. Generally, there is some seasonality as strong demand for the holidays moves prices higher into October and then prices tend to erode through the end of the year as much of the aggressive buying slows to regular demand and fill-in orders. This is a year during which prices fell in October, then rallied through the first half of November and are now declining again. It would seem prices may have a difficult time rallying again through the end of the year, but that may not be the case. We have seen numerous price swings this year of $2.00 to $3.00 or more per hundredweight making it somewhat uneventful or shocking to see large moves in a short period as it has become part of the normal market.
Even though consumers are dealing with high food prices, overall dairy demand is strong domestically and very strong internationally. Increased milk production is being processed and absorbed into the market. The recent October Cold Storage report showed American cheese inventory one percent below a year ago and total cheese inventory right in line with a year ago. This indicates good demand which is utilizing increased milk production.
The unknown is just how strong demand will remain after the holidays. First-quarter demand is generally slower as demand settles down to the usual and no one knows what that usually will be. High food prices will have an impact as consumers' disposable income tightens. The holiday period can be forgiving as consumers will spend money during the festive season. It is what comes after that that will determine milk prices.
Some predict dairy prices will remain strong through 2023 as international demand remains strong with less competition from other countries for market share due to weather, feed, and economic issues that they have been dealing with. U.S. farmers have had their share of issues as well but seem to be weathering the storm. Cow numbers have been increasing with the October Milk production report showing 31,000 more cows than a year ago at 9.418 million head and the highest cow numbers since May. It appears current milk prices are stimulating growth in cow numbers, but it had not been due to the expansion of facilities as that has been limited.
The bottom line is that milk prices will probably be lower than what they currently are, but the extent of the decline is uncertain. The prediction of strong prices through 2023 is rather vague as there is no specific benchmark this is being compared to. Do strong milk prices mean anything above $16.00, $18.00, or perhaps $20.00? Historically, those would be strong prices. When taking increased cost of production into account, then strong milk prices would likely mean milk prices will need to remain higher than $20.00. Now to be clear, I am referring to base prices and not mailbox prices.
Therefore, it is important to project your cost of production to the best that you can look ahead to next year. I know it is a moving target and can be difficult to nail down, but you will need to settle with a range and then work toward narrowing that range as opportunities surface to protect feed prices and other inputs if, and when, they arise. Along with that, floor prices need to be established for milk prices to ensure income while allowing for the potential to take higher prices if they unfold. This is risk management.
By ROBIN SCHMAHL
November 29, 2022