Milk Price Update: Uncertainty is Certain
November 29, 2021
There certainly have been and are many issues farmers are facing as they take care of business. There are always the challenges that are prevalent on a day-to-day basis with running a business especially when working with animals. There are so many things that need to be taken care of to keep the farm operating smoothly and profitably. However, there have been many new challenges that have surfaced over the past nearly two years. Labor challenges, product shortages, high feed prices, substantial price increases for good and services, just to name a few. Sadly, many farms have exited the dairy business. Instead of things getting better as time moves forward, it seems as if they are getting worse. Now with another new strain of Covid being discovered, it is uncertain as to the measures that mighty be taken to attempt to contain the spread.
During the early month of COVID-19, there was a surge in demand for dairy products as consumers focused more on nutrition as more meals were prepared at home. Dairy products will continue to be in demand as the world continues to deal with Covid. The question is whether demand will hold or continue to grow. There was a huge increase in the sale of packaged fluid milk products for a few months early last year, but that has declined significantly this year in comparison. For example, June 2020 conventional and organic packaged fluid milk sales increased 5.4% above June 2019 while June 2021 packaged fluid milk sales declined 6.7% from June 2020. This leaves June 2021 fluid milk sales 1.3% below 2019. The most recent conventional and packaged fluid milk sales report for the month of September showed a decrease of 1.3% compared to September 2020. The good news is that demand for other dairy products continues to grow offsetting the decline of fluid milk consumption.
The market is dealing with opposing events that may keep traders guessing and the market volatile. First, the monthly milk production reports have shown three consecutive months during which milk production per cow has fallen below a year earlier, milk production has declined, and milk cow numbers have fallen. The last time cow numbers fell below a year earlier was in December 2019. In fact, all of 2019 showed cow numbers lower than the previous year. This was in reaction to low milk prices in 2018 and early 2019. Now, we are seeing heavy culling as a result of the significant drought in some areas and as a result of escalating costs for feed and many products. Even with higher milk prices this year than 2019, there is less profitability.
The opposing event is inventory of American cheese has been increasing through October with inventory now 12% higher than a year ago. Total cheese inventory is 8% higher than a year ago. While milk production is declining, cheese inventory remains substantially higher. This results in an uncertain dynamic in the which will keep enhanced volatility.
The positive aspect of the market is butter which has been decreasing in inventory since June. This has allowed price to move to the highest level is has been since later December 2019. Nonfat dry milk price has moved to the highest level since August 2014. The result has been Class IV prices reaching and exceeding Class III prices as seen by the futures for the whole of next year.
The unknown now will be the level of demand after the end of the year. Much of the orders for the holidays have already been placed and shipped with regular and fill-in order being much of what will take place. Many buyers have already turned their attention to early demand for next year which will be difficult to guess as the market deals with both ongoing and new market disruptions. It will be very important to protect profitable milk prices if, and when, they occur and to use a strategy that will retain flexibility. 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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