Have the Markets Turned a Corner?
The market can be driven by trader psychology for a duration of time and can result in prices being overdone to one side or the other. Fundamentals will always rule in the end. Recent reports may indicate the market may see a change in thinking again.
Although the phrase, “These are the times that try men, souls” was first written by Thomas Paine during the American Revolution, it certainly can be adapted to the current commodity markets. News changes daily and even intraday. Volatility abounds. Instant access to news causes traders to run from one side to the other within a short period of time. In some cases, market psychology takes over pushing the market one way or the other for sometimes extended periods. This has been very evident in the milk market.
The first few months of the year saw milk futures push higher nearly every day with steady spot cheese prices a reason to believe there was strong support under the market. Even if spot prices declined, futures moved higher in anticipation the decline would be short-lived, which it was. Traders were focused on the idea that milk supply would continue to tighten as culling was heavy with production costs increase dramatically. This was logical thinking and provided support under the market. Buyers of cheese, butter, dry whey, and nonfat dry milk were aggressive in the spot market as they wanted to own the physical product early to avoid having to scramble for it later. Buying products early and paying storage for a longer duration than usual was a hedge against potential supply tightness.
Market psychology changed in early June as the impact of inflation was being felt throughout the country. Consumers were adjusting to higher prices by purchasing less of certain products and cutbacks were made on eating away from home thereby saving both money and fuel. It appeared the country was going to be in this high inflationary period for some time to come.
Buyers that had purchased dairy products early at high prices, were now concerned over the level of demand through the second half of the year. They were potentially now overbought on product for the time being. This resulted in them becoming less aggressive in the spot market while at the same time sellers wanted to move products at the best possible price and as quickly as possible. The result has been cheese prices falling back to the lowest level since early March, nonfat dry milk falling back to early January and dry whey falling back to prices of late December.
June Production Report
Milk production for June showed a surprise increase of 0.2% over June 2021. This was the first year-over-year increase so far this year. There were 4,000 cows added to the nation’s dairy herd since the previous month indicating that farmers are pushing milk even with higher input costs. This added to the bearishness already in the market.
However, the June Cold Storage report was also a surprise as cheese inventory declined.
This indicated movement of dairy products remains strong even though there are reports of slowing orders from retail and the food service industry. Seasonally, cheese inventory decreases from May to June and this year has been no exception. This may increase the interest of buyers on the spot market due to current low prices and the possibility that demand might remain better than expected.
Cattle Inventory Report
The other report that was recently released was the Bi-annual Cattle Inventory report. This showed the number of dairy cattle and the number of milk replacement heifers on farms as of July 1st. Dairy cows totaled 9.45 million head showing stability of cow numbers for July during the past five years. However, the number of replacement heifers was the lowest it has been since July 2005 at 3.75 million head. The ratio of heifers to milk cows was 39.7% and the lowest ratio it has been since July 2003. This indicates a tight heifer market and one that will limit expansion anytime soon. The strong beef market over the past few years resulted in more dairy cattle being crossbred with beef animals improving the profit potential from the dairy operation through marketing calves for beef as an additional revenue stream. Now the inventory of heifers is tight which will limit a surge in cow numbers if the cost of production improves. Some expansions will take place, but those expansions will be the result of purchasing cows from other farms that go out of business. This could set up an interesting scenario over the next few years depending on milk prices and the costs to produce that milk.
I will be at the World Dairy Expo this year in Madison, Wisconsin in the AgMarket.net booth TC 664. If you are making plans to attend, please stop by the booth to say Hi. The dates for the trade show are October 4 - 7.
July 25, 2022