August and September have historically provided some good longer-term milk contracting opportunities. While this has not been the case the last couple years as milk prices have trended higher, this year may be different.
Stepping back to assess the milk market’s bigger picture, there are a number of developments over the last six months that have not garnered much attention, because feed costs have dominated the headlines:
1. the duration of the current bull cycle. Since Class III futures began trading in 1997, the average bull cycle has lasted about 19.5 months. The longest bull cycle was 25 months, starting in August of 1997 and lasting until September of 1999. The current bull cycle, which began in August of 2006, is on its 24th month. If you end this current bull market cycle at May 2008’s high, then the cycle lasted 22 months. While no market cycle is ever exactly the same in terms of its duration, it is important to recognize the current bull cycle in milk could be at or near its maturity.
2. dairy cow numbers have grown at a tremendous rate. Year- Milk market biger than any one fundamental to-date, the number of dairy cows on U.S. farms grew by 60,000 head. This is the second fastest rate in the last 11 years. Dairy cow slaughter is running only about 1.9% higher than last year at this time, despite record-high feed costs.
3. total natural cheese stocks and total milk production have both grown year-to-date at an average rate of more than 3%. This is the highest average cheese stock growth rate since 1999, and the highest average rate of milk production growth since 2006.
4. large speculators in the milk market have reduced their net bullish futures position by almost 3,000 contracts over the last month, according to the Commitment of Traders report released by the Commodity Futures Trading Commission. These guys are some of the big players and market makers in Class III, and they do not usually reduce their bullish position by that magnitude in a strongly higher trending market.
5. the domestic and global economy is slowing. Job layoffs and unemployment figures have been rising. Consumers are feeling the pinch of rising energy costs 28 Midwest DairyBusiness August 2008 and overall rising costs of living. Consumer confidence in the United States and around the world has fallen to levels not seen in more than a decade or longer. Subprime woes and bank failures have not abated. A strong consumer is extremely important to the milk market, and the consumer’s strength and depth of pocketbook has to be brought into question.
Producers have cited higher feed costs and higher costs of production as reasons why they have not or will not develop a marketing strategy. The factors listed above are reminders that the milk market is bigger than any one fundamental. While feed costs are an important factor within the milk price cycle, there are dozens of other fundamentals which influence milk prices. If every other fundamental points towards lower milk prices, then high feed costs may not be enough to support the whole market. If a reduction in supply is needed, the milk market will be driven down to unprofitable levels.
Indeed, the next couple months could provide some rallies and some upside pricing opportunities for milk producers. Take advantage of this potential seasonal strength and develop a marketing strategy that protects your downside price risk through the end of 2009.