Marketing: Can rally hold through 2011?

The dramatic increase underlies bullish fundamentals, but have a strategy in place in case markets turn.

By Matt Mattke

Matt Mattke, Market360® dairy advisor at Stewart-Peterson

Q: Milk futures prices have rallied sharply since the end of December and the 2011 Class III average futures price is quickly approaching $17.00/cwt. Is a $17.00 average price sustainable for 2011?

A: It is possible milk futures prices for 2011 could hold at a $17.00 average for the year. In 2007, milk prices averaged $18.03/cwt., and in 2008 milk prices averaged $17.44/cwt. While those were the two highest calendar-average prices  the milk market has ever seen, one cannot rule out the possibility of 2011 milk prices matching or even exceeding either of those averages

So far in 2011 there have been several other livestock markets reaching some unthinkable and unprecedented levels.

• In January, the price of Live Cattle futures rallied to a new all-time high, with the February 2011 contract reaching $112.25/cwt.

• The Lean Hog futures market also reached new all-time highs in January, with the April and June 2011 Lean Hog futures contracts reaching $94.52/cwt. and $100.95/cwt., respectively.

The prior all-time high for Class III milk is $22.45/cwt., for July 2007. While milk prices still have a lot of work to do to get back to a $22.00/cwt. price level, one cannot rule out that possibility between now and the end of 2011.

The sharp rally in milk prices from Dec. 21, 2010 to Jan 31, 2011, was sharper and faster than any of the prior big market rallies seen in 2004, 2007 and 2008 (all of which led to at least one month of $20.00/cwt. milk).

• It took the March 2004 milk contract three months to rally from $11.30 to $14.40.

• It took the March 2007 milk contract almost 13 months to rally from $11.25 to $15.05.

• It took the March 2008 milk contract about nine months to rally from $14.75 to $18.60.

• It took the March 2011 milk contract just seven weeks to go from a low of $13.58 to a high of $18.57.

This dramatic rally suggests there are some very strong underlying bullish fundamentals brewing in the cash market that could linger for a large part of 2011.

This answer so far paints a seemingly rosy picture for milk prices, creating the impression there is little to worry about for 2011. Once Jan. 1, 2012 comes along, we’ll all be able to look back and see what kind of year 2011 turned out to be for milk prices.

On that day, the goal is not to look back on 2011 with regrets and “should haves,” seeing $17.00 milk prices turned into $12.00 prices and having taken no action. While the trend looks good for milk prices right now, we have seen how quickly things in the milk market can change.

Thus, it is imperative producers have a strategic action plan in place, in case 2011 milk prices do take a turn for the worst. Maybe that plan is to buy put options, systematically scale into milk sales, and/or follow the market with “stops.” Whatever the strategy turns out to be, it is important that there is a pre-determined action plan in place.

FYI

Matt Mattke, Market360® dairy advisor at Stewart-Peterson, can be reached via e-mail: mmattke@stewart-peterson.com, phone: 800-334-9779 or visit www.stewart-peterson.com. His column appears monthly in Eastern DairyBusiness magazine.

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