By Matt Mattke
The continued drop in milk prices is overshadowing one important market dynamic milk producers need to keep in mind: seasonality. Right now the milk market is comparable to harvest time for grains. Milk and cheese production are at peak levels, and cheese inventories are building.
This trend will not continue indefinitely through year’s end. Milk and cheese production will likely peak in May or June, and cheese inventories will likely peak in June or July.
Some may argue that it does not matter if cheese inventories do peak along seasonal lines; prices will stay depressed because inventories are so much heavier than last year. Here is our response to that thought. Don’t focus on the absolute level of inventories of cheese. The focus needs to be on the direction of inventories. If inventories are growing, prices will drop in response, and if inventories are dropping, prices will rise in response.
Market conditions are favorable for cheese inventories to drop seasonally in the last half of 2009. At the time of writing this article, corn futures are at $4.30/bushel, soybean futures are at $11.85/bushel, soymeal futures are at $380.00/ton, and May to August milk futures are averaging a mere $11.50/cwt. And don’t forget the potential impact of adverse weather on milk production.
Bottom line, this is not the time to be piling into forward contracts or hedge positions in last half of 2009 contract months. After a 12-month slide already in milk, forward pricing your last half of 2009 production at the time of peak milk and peak cheese does not put the odds in your favor. The summer months have historically provided better pricing opportunities.