May 7, 2020
Robin Schmahl
Even though there has been little change in the overall fundamentals in the dairy industry, cheese and butter prices as well Class III milk futures have been showing strength. There seems to be an anticipation that a reopening of the country after the lock down or should I say shelter-in-place mandate is lifted, that there could be an increase of demand. Buyers of cheese and butter may be anticipating more orders in the months ahead as the food service industry moves more toward a pre-coronavirus level of demand. The extent of this or the potential of this is unclear. But perception is what moves the futures market.
Farms being required to reduce milk production by 10 to 20 percent this month is a positive element to moving supply back in line with current reduced demand. This will take place over this month and not just on a daily basis. The market will not move to a deficit over night. However, looking at the movement of Class III futures, one would think supply is already tightening. It is certain good to see life in the markets with spot price and futures prices regaining some of the severe losses experienced earlier this year.
Analysts are all over the place as far as the projection of milk prices this year. Typically, there are variations, but this year the variations will be extreme. One key to price potential might be on how much milk production falls and how much inventory increases. If inventory increases for the next few months, upside price potential may be limited.
There is one element that also needs to be kept in mind. With the increase of milk futures recently and if futures show further gains over the near-term, the thought process may change for some dairy farmers to reassess milk output strategy. Rather than reducing milk production to any degree, production may be kept at a higher level in order to be able to take advantage of higher milk prices if supply tightens sufficiently to cause plants to lift the restrictions on production. Farms could feed milk to calves, possibly add a certain amount back into the ration, dump the milk, or take the reduced price being paid in order to be ready to hit it hard when higher milk receipts will be allowed and higher prices may be realized. There always is a thinking that someone else will cut back significantly or go out of business resulting in a shorter period of time required for plant milk production restrictions to be in place. Any way one looks at it, it will require quite a bit of management in order to accomplish desired goals and to speculate on future market prices.
It certain is a difficult market situation for dairy and for many other food products. It is something that we have never seen before and likely one that will not be figured out and move back to a normal anytime soon. There is no doubt there will be much volatility in the market as the year progresses.
milkbusiness.com
