Unprecedented Milk Markets Demand Attention

March 8, 2022

Robin Schmahl

There are so many outside influences affecting the financial and commodity markets that make it very difficult to predict what the market will do from day to day. We are being bombarded with news that can be either considered considerably bullish or considerably bearish to the market on any given day. Trading futures is not for the faint of heart at the present time. However, one should not just tune the market out and anticipate strong prices for the foreseeable future or the rest of the year. This is the time when options and option strategies should be employed.

There are many things that influence the market and likely none of us have seen what we are seeing at the present time or might be seeing as the year progresses. The conflict in Ukraine has resulted in higher feed, food, and fuel prices. Ukraine is a large supplier of wheat, sunflower oil, and corn to the international market. In fact, Ukraine is the world’s largest exporter of sunflower oil. The impact of the conflict on these exports is uncertain. They are already shifting from exporting out of their ports to transporting agricultural products by rail to neighboring countries to ship out of other ports. This will increase costs and may also run into problems over time. Importers of grain from that country are scrambling to find products from other countries to fill the void. The result so far has been substantial gains in many commodities.

Impact on Dairy

Dairy has not been directly affected by the situation in the Ukraine. Dairy prices have been moving relative to supply and demand as well as optimism. However, dairy will be impacted by rising feed prices as reduced exports from the region will increase demand to those countries that have grain available for export. Tighter supply has increased grain prices substantially and is likely to increase grain prices further as time moves forward.

Heavy culling of dairy cattle has been taking place since July due to rising feed prices because of the drought in some areas of the country last summer, as well as strong demand both domestically and internationally. U.S. cow numbers in January were 82,000 head less than January 2021. This is significant in itself, but milk production per cow has also been impacted, showing a decline of 15 pounds from a year earlier. That has had an impact on the market, but not yet to the point that there is a milk shortage. Most areas report sufficient milk supply for demand with only the category of American cheese showing a decrease of inventory in January. Butter and other cheese categories showed an increase of inventory.

This is likely due to this being a period of time during the year when dairy demand in generally slower. If feed prices continue to increase and the drought remains in the U.S as is currently seen or even expands this spring and summer, there is no telling where grain prices could go. Reduced feed availability and higher feed prices will impact milk production. Supply of milk could tighten, pushing milk prices higher than futures currently indicate. Class IV futures are already at record levels. Class III prices still have a way to go to set a new record, but they continue to climb.

As I stated earlier in this article, it is not the time to shut out the market and anticipate higher prices for milk will continue or hope that feed prices will decline. Strategies using call options and call option spreads need to be implemented to protect against further increases of feed prices. Strategies using put options and put option spreads need to be implemented to protect the high milk prices. These strategies will provide floor prices for your milk and ceiling prices for your feed. Options will provide price protection and will allow you to concentrate on doing the best you can with your business without the stress of worrying what the markets are doing from day to day.

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