The rally that started in the powder markets has quickly spread to encompass the entire dairy complex.The dairy market has put us all on our toes again. Just when we thought we knew what makes prices tick, they tock. The price of milk has risen between 5% and 10% in just the past four weeks. And, in my opinion, this is just the beginning of higher prices to come.
It’s not news to say that advances in export demand over the past half-decade are the linchpin of growth for our U.S. dairy industry. Stemming from a confluence of a weaker U.S. dollar, global weather-related production problems and the world’s desire for high-quality dairy foods, the U.S. dairy export market has doubled since 2007 to somewhere close to 13% of total U.S. production.
The growth has not come easily, however, as ebbs and flows in both seasonality and taste preferences of other nations have made for tumultuous swings at the supply/demand margin and prices. And as we’ve focused on the U.S. milk «flush» over the past few months, that global seasonality reared its head and is taking center stage here and now.
Sometime in early March, discussions of drier weather in New Zealand went from «what if» scenarios to a more serious «we have a problem» reality. Chatter reached a fevered pitch, and global prices responded by rising rapidly as buyers focused their concern on the impacts of long-term drought. Earlier forecasts of year-over-year milk production growth in Oceania dried up with the pasture. China and other major world buyers turned a worried eye to the jeopardy this places on next milking season. U.S. buyers followed suit, and the U.S. dairy markets adjusted higher — and how.
Ironically, the rally that started in the powder markets and has quickly spread to encompass the entire dairy complex comes not only during the «flush» but also on the heels of some robust domestic dairy product production data. For example, U.S. Nonfat Dry Milk (NFDM) production registered at over 137 million pounds in February of this year. While this is down some 20% from 2012, it is still well above the five-year average production of nonfat. USDA reported that commercial stocks of NFDM are around 16.5% higher than they were when we made all that powder last year. And similar production and inventory situations arise across the board for dairy products.
Although seasonally U.S. American cheese production was down from January, USDA figures marked a record 346 million pounds for the month of February. This is particularly daunting as we see these overall strong product production figures during what is typically a very challenging time period for domestic dairy demand. If you look at our current supply/demand situation from a domestic lens, you’d have a hard time making a reasonable argument that prices should go higher. Yet, dairy prices are on the rise.
In April of last year, block cheese prices were in the low $1.50s, and Class III hovered around $15.00/cwt. two months out. Today block cheese is at $1.75, and Class III futures are $18.00-$19.00 two months out. Class IV prices are even higher. To many, this doesn’t make much sense given the facts of the day. But it’s the futures markets for dairy that have led the charge higher as we shift our focus to the uncertainty of market conditions ahead.
So what are producers to do?
As profit margins increase courtesy of weakening feed costs, the sensible approach is to focus on bringing profit home to your operation. Within that approach, however, recognize that markets can act highly irrational as uncertainty looms. I expect this to mean higher milk prices going into the summer months. Take advantage of price increases as they happen. Lock in profit as you can. Or secure a floor price on your production. Banks will accept some rough times but have a hard time swallowing $4.00 and $5.00 per cwt. losses like were experienced in 2009. And you don’t want your dairy to be blowing in the breeze when the world realizes it has enough dairy in its fridge.
Source: Â AgWeb