Strong Dairy Demand Drives Prices
January 13, 2022
Since the beginning of the year, the markets have shown the battle between perception and reality. Dairy futures increased significantly after the United States Mexico Canada Agreement (USMCA) panel finding of the inequities of the application of Tariff Rate Quotes by Canada. The panel has given 30 days for Canada to rectify this situation to conform to the USMCA trade agreement. The perception was that this would open up the potential for more exports to Canada, increasing demand at a time when the U.S. dairy herd has been contracting and milk production declining. Any greater increase in demand would mean higher prices.
Buyers became aggressive in the daily spot market, pushing prices significantly higher as they wanted to increase ownership to make sure they would have sufficient product for later demand. This pushed futures contracts substantially higher as short-covering and new buying interest erupted. However, buying interest in cheese waned, resulting in a wave of selling later in the week. Prices of butter, nonfat dry milk and dry whey held and increased through the end of the week. However, even with continued increase of these prices, butter futures fell back significantly.
The market is trying to find the balance between perception and reality. The perception is that exports to Canada may increase. The reality will be whether they do. I know the odds of greater exports to Canada are likely, but we can never be sure unless we see the numbers over time.
The Big Picture
Looking at the larger picture, overall dairy exports this year have been exceptional. Exports for the month of November showed total exports up 18.9% over November 2020, with the value of those exports up 31.5%. Year-to-date exports are 12.0% above the same period last year. The total value of those exports is 18.0% above the same period last. There has been much discussion over the bottle neck of shipping from ports and issues with trucking. However, the dairy industry has been able to thrive despite those issues as clearly seen on the reports.
Large increases of import demand have been see from Southeast Asia as shipments this year are 37% higher than last year. Shipments of dairy products to South America increased 37% as well. Shipments to Central America increased 196%, China up 27% and Mexico increased 9%. There is strong demand for dairy products at a time when some other major dairy export countries have seen reduced production. This has set the stage for a market that is attempting to find a price level at which demand will slow or production will increase. Or possibly both.
Evaluating Cost of Production
High prices cure high prices, but there may be little more to it this year than many other years. Inflation is increasing the cost of goods and services. Feed prices continue to increase. Shortages are evident for many products. This has increased the cost of production significantly. It will be very difficult to forecast a cost of production this year due to a lot of uncertainties.
My recommendation is to utilize hedging strategies that provide for flexibility on some of your milk production. Option prices have increased in value due to the volatility, but there are strategies that can be implemented to reduce the cost yet still provide protection.
Premiums have also increased for Dairy Revenue Protection insurance but still provides a floor to protect against any unforeseen events that could impact the market. With other prices escalating, it will be imperative to protect milk prices with a strategy that provides flexibility. Please call us if you need any help with developing a marketing plan.
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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