Will Dairy Prices Continue to Trend Higher?
March 8, 2021
Since late last year, there has been a certain amount of optimism for dairy prices. Some of that optimism has been due to traders looking back over their shoulder at the impact the Farmers to Families Food Box programs and the impact it had on dairy prices. Many believed there was to be a repeat of strong prices once the fifth round of the program was announced at the beginning of the year, but it had no impact at that time. There had also been renewed optimism prior to that when the stimulus bill passed just before Christmas and more money was appropriated to the Supplemental Nutrition Assistance Program (SNAP). That also did not have any real impact on the market at that time either. In fact, cheese and butter prices slipped lower after each of those events.
Recently, the market seems to have woke up with cash prices trending higher and impacting futures contracts. Butter was the first to post a strong change in trend with price increasing $0.48 in a little over a month moving price to the highest level since July 2020. Cheese has recently been trending higher as well. Dry whey has a very different story with price in an overall uptrend since early July 2020 with price increasing around $0.29. Strong demand from China continued pushing price higher as they were rebuilding their hog herd.
Right now, market sentiment seems to be changing as government buying for food programs and increasing demand from the food service industry as restrictions are relaxed. Cheese and butter production is strong and increasing as milk production increases seasonally toward spring flush. Inventory is increasing and above year earlier levels, but greater demand will limit the amount of growth in inventory. It is unclear how much greater impact on demand we could see from the American Rescue Plan stimulus bill that has recently been passed. It will extend the 15% increase added to the Supplemental Nutrition Program through September as well as provide more money to aid food distribution programs. What it does not indicate is that there would be another extension of the Farmer to Families Fox Box program. Of course, that program or a similar program, could be extended as well further than the end of April. If not, and distribution of food through other government programs continues without it, demand through government programs will slow, but still be strong.
Class III milk futures are reflecting this optimism. The average Class III price at the close of Friday for 2021 was $17.56 and would be the second highest average since 2014 when it was $17.82. This compares to an actual Class III average of $18.16 for 2020. On their February report, USDA estimated the average Class III price for this year at $16.60 nearly $1.00 lower than what futures are currently estimating. Of course, making these predictions is very difficult and are changed on a monthly basis based on what cash and futures have been doing prior to the next World Agricultural Supply and Demand report.
The report to be released on March 9th, is expected to show average price increases due the recent strength of prices.
It is always difficult to determine market direction throughout the year in general due to many factors being involved that can influence the market. However, government programs or the lack thereof, makes it extremely difficult. That is why it is very important to have a marketing program that provides downside price protection while allowing for upside price potential. With current Class III futures showing a good historical price averages, it becomes important to protect those prices. We have a long year ahead of us and a lot can happen.