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Why There’s Downside Risk for Milk Futures, But Upside Risk for Feed Prices

October 2, 2020

Milk futures saw a solid start to 2020. As futures rose to $20/cwt, optimism about pricing opportunities in 2020 sprouted. However, COVID-19 caused prices to change course, with milk futures spiraling lower.

Milk futures have stabilized since spring, but with uncertainty still in the picture, some market analysts warn downside risk could be ahead.

“I think there's more risk. The caveat being plenty of room for upside as we're just living in a crazy world with loads of government support and new trends when it comes to you know just how to get food to the consumer,” says Ryan Yonkman, Vice President, Rice Dairy. “In short, from the dairy farmer's perspective, our risk is to the downside, that's where we get hurt the worst, and we're currently propped up at prices that guys can manage around.”

Yonkman says considering that, Rice Dairy’s focus right now is to focus on managing prices by setting floors. Yonkman thinks that will give a dairy producer the opportunity to keep as much as the upside as possible, as volatility is still alive in the milk market.

As Yonkman mentioned, part of the reason milk futures saw a boost was due to government support. Matt Gould, Chief Market Analyst with Rice Dairy, says once USDA announced the USDA Farmers to Families Food Box program, block cheese prices went from the  lowest prices seen in years, to near record highs. So, are government programs artificially propping up prices? The answer isn’t simple.

“Absolutely the farmers to family food box program has had a direct price supportive impact on dairy prices, particularly cheese, but then as we look forward and we look into 2021, where we presumably will have less government intervention, where we'll hopefully have a vaccine will return to more closer normalcy, you start to wonder about the opposite impact where you had all this government intervention in the forms of product purchases, but also direct payments,” says Gould. “As you carry into 2021, what does that mean in terms of milk supply? We certainly did not have the consolidation that we would have had otherwise, because of the government support.”

Will Feed Prices Climb Higher?

As milk futures have trended higher, feed prices have remained relatively low. So, will feed prices remain low? Mike North of Commodity Risk Management Group cautions higher corn prices may be ahead after USDA’s latest report showed old corn stocks as of September 1, were lower than expected, indicating the 2019 corn crop was smaller than USDA originally stated.

“It really does underpin the market with a bit more support,” says North. “It kind of fuels the fire for anybody that still believes the 2019 crop was overstated in terms of yield. And it really puts more pressure on the U.S. crop to perform as the USDA has pegged it in previous reports with record yields.”

North says as USDA prepares to release an updated look at 2020 crop expectations later this month,  the market will keep a close eye on any adjustments to not just sticks, but adjustments to 2020 yields.

“It'll put a lot more pressure on yield to be there and to hold up, and f not, smaller balance sheets are going to continue to create a stronger bid in this market,” adds North.

North says if you’re a seller of corn, this adjustment to old crop stocks may give you a “gift” to look at selling into next year. However, if you’re a buyer of corn, North says it may be time to act.

“If you're a buyer of corn, it really puts the owner of the onus on you to jump into this market and protect yourself against any potential pitfalls in a South American crop and any changes to the demand environment as we go forward,” says North.

So, has the corn market put in its lows for the year? North thinks the answer is “yes.”

“Given Wednesday's report, it would be tough to imagine going below $3.20 on corn,” says North.



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