Each year the volatility in the dairy markets seems to increase. Market participants need to be aware of more aspects of the market that have significant influences. One of the large influences this year is bird flu and the impact it has had and will have on milk production and cow numbers. The shortage of replacement heifers and high beef prices will have a substantial impact. Increased tariffs under the Trump administration may impact international demand. This list can be added to as the year progresses. The uncertainty of traders can enhance volatility as they trade on a short-term basis, which is termed as scalping the market for a quick profit if one develops. This reduces the buy-and-hold action of a market that is trending.
Volatility in futures is one thing but volatility in the spot market is another. The recent price movements in the block cheese price have been unprecedented. We have seen substantial moves in either direction that have resulted in substantial movements in milk futures. However, the daily price swings seen recently have been incredible. This has not resulted in much price change over time, but it has been a sight to behold. The volatility of this magnitude in the futures market is difficult to predict, but volatility in the spot market makes it impossible to predict. This can increase volatility as some traders step back waiting for the market to settle down. Fewer market participants allow for increased volatility.
The final rule on the amendments to the milk marketing orders was released last week after a lengthy process. These changes will not go into effect until June 1st. These changes have been anticipated and will not create price volatility because of it. It will result in a different pricing structure that we all will need to adjust to. Now that these changes are known, the Risk Management Agency may be able to eventually release component pricing for the Dairy Revenue Protection (DRP) insurance program again. This has been a huge reason why component prices have not been released under the program. They did not want to release component prices when they were uncertain of risking the potential for indemnity payments or taking away indemnity payments once the changes were implemented. Hopefully, this will remove the uncertainty and allow the DRP insurance program to revert to the way it had been earlier when both class and component prices were released daily.
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.
