That is not the case as milk production is running lower than a year ago. So why are prices as low as they are? Slow exports are the first item that comes to mind as they have been struggling for quite some time. The level of exports has an impact as it is a global market and global demand is important. The more dairy products that can be moved to the international market, the more demand there is to utilize production. Even if we see dairy exports increase over the previous year, it is still not great as exports a year ago were substantially below the level of 2021. But a gain in exports will be heading in the right direction.
Demand for dairy is not as good as hoped moving through the second half of the year which has resulted in supply being readily available. Demand has been steady, but it has not been good enough to tighten supply. The October Cold Storage report showed both American cheese and total cheese stocks one percent above October 2022. Sellers of cheese have been moving supply to the market as quickly as possible rather than allowing it to build up at the plant level. They have been unwilling to hold supply due to increased storage costs. Sellers have been lowering offers without hesitation resulting in buyers holding for lower prices. This pattern is not expected to change anytime soon in the current market environment.
The fall price rally in cheese took place in July and August and then turned lower rather than prices trending higher into the holidays. Buyers took advantage of the low prices in later June and stepped up more aggressively. There had been concern that farmers would cull cows due to the low milk prices and high beef prices. Buyers wanted to get ahead of a tighter market. This spurred strong buying interest until it was seen that culling was not increasing as much as anticipated and milk supplies remained sufficient. Without stronger prices moving up to the holidays, it is unlikely prices will trend higher anytime soon.
Cheese prices have yet to find as bottom as cheese continue to be offered and buyers continue to hold back. Eventually prices will be low enough that it will stimulate demand or supply will be curtailed. Low prices will cure low prices.
I have said it before and will say again that risk management is of utmost importance. The market is going to do what it is going to do driven by supply and demand. One thing that needs to be realized is that the market does not care whether someone remains in business or not. There have been some who have thought the current market is being manipulated and the reason for low prices. There is no evidence of this as current milk production, exports, supply, and demand are the reasons for lower milk prices. Those who have employed the risk management tools available to protect prices have fared much better than those who have not. I have talked with numerous producers whose only risk management is the Dairy Margin Coverage program. That is all well and good, but that is only part of it. Those who have utilized Dairy Revenue Protection insurance over the past year have seen substantial indemnity payments. Those who have used option strategies have seen substantial price protection. Risk management is as important as anything else you do on your farm. If you would like to discuss what you can do and would like help with risk management, please give us a call.
