9/09 Marketing: Fundamentals – direction of inventories will signal switch to bulls

By Matt Mattke

Q: There seems to be so many over-hanging bearish fundamentals for this milk market. Is it possible for the 2010 average to get any better than the $14.50/cwt. currently indicated?

A: Fundamentals can begin to change behind the scenes before any bullish developments are widely perceived. All that is needed to get prices of any commodity moving higher is not bullish absolute inventory levels, but falling inventories. If the market as a whole sees inventories declining, then there is going to be upward price pressure.

Current dairy product inventories are much higher than last year, but the major question for the future is: Are inventories going to continue to grow from here, or decline?  If inventories do start to decline, then the speed and magnitude with which inventories drop will determine how high milk prices will rally.

From a year-over-year analysis of percentage changes in milk prices, percentage changes have been getting larger, exhibited by the wider year-to-year swings (Table 1). So far, year-to-date, the all-milk price is almost 60% below last year, and this is the second year in a row where the year-over-year all-milk price has declined. Looking back at each year back to 1996, when milk futures first began trading, two consecutive “down” years is about all the milk market suffers before having an “up” year.

If the trend of larger year-over-year percentage changes continues, then a 40% or larger increase over the 2009 average all-milk price is not out of the realm of possibilities for 2010. Bottom line, be careful about jumping to conclusions on where the 2010 milk price could go to the upside. Yes, fundamentals are bearish on the face of things right now, but changes can be taking place behind the scenes that we are not seeing yet. After the worst bear market ever experienced in terms of dollars being lost per hundredweight of production, some decent upside, even above the current $14.50/cwt. futures average for 2010, cannot be ruled out. In fact, based on our analysis, we see $14.50/cwt. futures being at the low end, and $16.75/cwt. futures being the upper end of the range of what 2010 could average.

FYI: Matt Mattke is a Market360® adviser at Stewart-Peterson. He can be reached via e-mail: mmattke@stewart-peterson.com, phone: 800-334-9779 or visit www.stewart-peterson.com.

From a year-over-year analysis of percentage changes in milk prices, percentage changes have been getting larger, exhibited by the wider year-to-year swings.

From a year-over-year analysis of percentage changes in milk prices, percentage changes have been getting larger, exhibited by the wider year-to-year swings.

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