Milk Prices: Could the Trend be Changing?
September 22, 2021
Dairy prices have not shown much to get excited about for much of this year. There has been some volatility at times when Class III milk futures moved higher as a result of strength in the underlying cash. However, those periods of gains have been short lived.
The result has been cheese prices remaining in a range while milk futures have been slowly eroding. The opposite has been true for Class IV milk futures since the end of July. Both butter and nonfat dry milk prices have been in an uptrend. In fact Grade A nonfat dry milk price has been in an overall uptrend since May 2020. This has moved both Class III and Class IV prices close together. The positive aspect is that it has reduced or eliminated negative Producer Price Differentials.
The concern in the market is that milk futures show slow little price fluctuation over the next more than a year. If strength does net develop in underlying spot markets over the next two months, it raises the concern over price potential once end of the year and holiday demand is finished. Feed prices still remain high with some areas facing a shortage of feed due to the drought. That is likely why culling is increasing.
The August Monthly Milk Production report showed higher production than the previous year of an increase of 1.1%, but it is the least gain so far this year. This may indicate a lower trend has developed since the highest production month of May. Hot weather has had something to do with that as numerous areas recorded record temperatures some days. The heat impacts the appetite of cows resulting in less feed intake and lower milk output. This could be temporary as we may see production increase as rest of the year progresses and cow comfort improves. Higher feed prices are also having an impact as farms increase culling in order to reduce the amount of animals required to be fed. The decline of cow numbers from July to August was the biggest surprise. The number of cows on farms fell 19,000 head from July. Overall cow numbers are still at 9.48 million head, up 106,000 head over a year ago. However, there may be further decreases in cow numbers over the coming months.
The other aspect to take note of is that production per cow in the country declined one pound from August 2020. This is significant as the last time production per cow declined from the previous year was November 2017. A case can be made for stronger prices if this trend would continue, but it may take some time for this to unfold. Even though the pace of milk production has slowed, it continues to remain higher than a year ago. It will take an increase of demand in order to tighten supply along with a decrease of milk production. Yet, upside price potential may be limited under current market fundamentals. We certainly hope there will be greater volatility in order to provide opportunities for protecting profitable milk prices.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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