The past week has been filled with disappointment for dairy farmers. The strength of the market two weeks ago gave rise to the potential the bottom of the market was in, and higher prices may unfold over time. The recent price rally of milk futures stemmed from the bullishness of the January Milk Production report. There was an increase in underlying cash prices, possibly because of buyers being more aggressive from concern over a continued decline in milk production. But buying could have been more aggressive due to immediate orders that needed to be filled. It seems as if the latter was the reason for the bump in prices as strength did not follow through. Both Class III and Class IV milk futures eliminated the gains realized after the milk production report and then some. Prices are not yet ready to trend higher. The market must prove itself before a long-term trend develops.
The January Milk Production report showed a large decrease in cow numbers from December which is what traders had anticipated to take place over the past few months. When it finally came, traders were ready to buy into the market. After all, a decrease in cow numbers from one month to the next took place in 2021 with milk prices reaching record highs the following year. Traders were ready to get on the bandwagon early in anticipation of the market repeating that move. Not only were cow numbers down 23,000 head, but milk production declined by 1.1% and production per cow declined 7 pounds from the previous year. This should be considered bullish, but it seems too early to generate any shortage concerns. Lower milk production at a time of lower demand does not result in a tightening supply. However, a few months of similar reports will increase the excitement of the traders and the industry.
Underlying cash prices have not moved in tandem with milk futures as trader perception is moving the market. Both block and barrel cheese prices are higher than they were a week ago in the case of barrels with blocks about at the same price. This would have provided support under Class III futures if it were not for the weakness of dry whey. For the week ending March 1st, dry whey price fell 9.75 cents which impacts the price calculation significantly. The decline equates to a loss of 58.5 cents for the Class III price. Dry whey is currently the anchor on the market. Class IV futures have fared better, but the recent weakness of the butter price put pressure on Class IV futures.
One aspect to remember is that spot milk prices are vastly different from a year ago. Current spot milk prices range from 0.25 cent to $2.50 over class. Extra milk supplies have tightened and are significantly tighter than a year ago. A year ago, spot milk prices were consistently $8.00 to $10.00 below class for much of the first half of the year. So far, manufacturers have sufficient milk to maintain production schedules and satisfy their obligations. This may become a bigger issue once the market moves through the spring flush and into the summer months. The current weather pattern may result in spring flush taking place early and could continue longer. This would keep the market from becoming tighter on supply for a longer period.
If the pattern of declining cow numbers and milk production continues with spot milk supplies tight and at higher prices, it could result in stronger milk prices during the second half of the year. The extent of price strength will be up to the level of both domestic and international demand.
Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
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