The Risk of Lower Milk Prices
We are now past the middle of October which can be a pivotal point for dairy prices. Historically, October is generally the high of the year when demand is strongest as buyers are filling orders for regular demand as well as holiday demand. Yes, the holidays are still a way off, but the industry has been preparing for this for some time already. Packagers and recuttters begin purchasing and preparing for the holidays in September in order to make sure packaging and shipping is completed ahead of time to move product into the desired areas. Once most of that demand is filled, regular demand continues with orders needing to be filled on an ongoing basis.
This year may again be an exception to the historical trend as we have already seen. Cheese prices have not been able to trend higher over the past month. Inventory is plentiful with fresh production able to meet the needs of buyers without difficulty. Buyers have been purchasing earlier than usual to insure they have sufficient supply on hand. Retail outlets have placed orders ahead of time to ensure product gets to where it needs to be on time.
On top of this, we have high inflation that looks like it will continue for an extended time. The latest Consumer Price Index showed an increase of 8.2% making it the seventh consecutive month the index has been above 8.0%. This will require further significant interest rate increases to slow the rate of inflation which may impact the purchasing power of consumers and impact demand.
Cheese prices not being able to trend higher during this time of year might indicate that we might not see further upside. There may be more downside risk as we move through the rest of the year. Lower demand through the holidays may put significant pressure on milk prices.
I wrote an article on June 13th showing the impact on milk prices during the recession of 2007-2009 and it was not good. The current financial state of the economy is following a similar pattern. For all practical purposes, we are in a recession, but the government has not officially recognized it. Whether it is official or not, it is impacting demand for many things with dairy not immune to it.
Yet, even with many areas indicating the potential for reduced demand and limited upside price potential, many continue to feel dairy is going to fare better and milk prices will remain strong. Many have not developed a marketing plan to protect milk prices having the idea that spending the money on option strategies or Dairy Revenue Protection insurance will be a waste of money that could be better spent on other things. This thinking leaves the farm open to risk and the possibility of significant financial loss which could put the farming operation in jeopardy. This is similar to not purchasing insurance for the farm taking the chance nothing will happen to it or no one will get hurt. Or not having health insurance believing nothing will happen. Yet, many will take the chance with thousand, hundreds of thousand or even millions of dollars of income on the line. We cannot predict the future and that is precisely why risk management is so important. If inflation is not brought under control for an extended period of time along with many of the other outside influences the market is currently dealing with, milk prices may move lower than some are predicting.
The recent World Agricultural Supply and Demand report was positive in that USDA increased their estimates for milk prices from their previous estimate in September. However, looking at their estimates for milk prices next year, it raises substantial concern. Although Class III milk price is estimated to average $21.90 this year, the estimate for next year is $19.80 or $2.10 per cwt lower. The average for Class IV this year is $24.60, but the average for next year is $21.00 or a drop of $3.60 per cwt. The average All-milk price this year is $25.60 while the average next year is $22.90, a decline of $2.70 per cwt. These are just estimates and many times are based on what the futures markets are showing. However, it is very sobering and one that should spur one into making risk management just as important as any other area of the farming operation. Please let us know if we can help you in any way with managing risk.
October 18, 2022