2014 vs 2022 - Strong Milk Prices Not the Whole Story

 Not only is demand strong in the U.S. but it remains strong worldwide. The Global Dairy Trade auction price index reached the highest level is has been since February 18, 2014. Strong demand is taking place at a time when the growth of milk production has been hindered by weather and/or high prices for goods and services in many areas of the world. This has led many to expect higher prices to hold and increase. The potential for prices is uncertain with the feeling it will take higher prices to slow demand or for farmers to increase production.

There are comparisons being made to 2014 when milk prices were very strong. There were 11 months that year with Class III milk prices above $21.00 with the average price for the year of $22.23. Class IV prices were strong as well with 10 months above $21.00 for an average price for the year of $22.09. The All-milk price stayed above $20.00 for the entire year with price averaging $23.98. Current Class III and Class IV futures prices look to be very similar with prices for 11 months of the year yet to be realized. This is why this year is being compared to 2014. However, we should not only like at price because there are many factors that could impact prices as the year progresses.

It is unlikely milk production will increase significantly anytime soon. Farmers may not be very anxious to add cows or expand due to the uncertainly of milk prices, feed costs, input costs for crops and rising prices for nearly everything else. Declining cow numbers have yet to slow with stable cow numbers maybe the best we can hope for over a period of time. Any increase of cow numbers will consist of filling empty stalls rather than expansions.

Increasing feed prices are a real concern limiting any benefit of higher milk prices for the time being. Concern is increasing for crop production this year as the drought monitor map shows varying levels of dryness to drought in much of the Western half of the country. This does not make one feel warm and fuzzy about feed prices for the upcoming year. Many times, we focus on milk prices and the potential for milk prices based on supply and demand. However, it is just as important to look at feed prices. Input costs need to be protected for adverse events that may lead to higher prices. This is one of those years. Grain prices may look high historically, but that does not mean they are high relative to current fundamentals and the outcome of crop production in South America and a crop that will planted in the U.S. over the next few months.

Higher milk prices may not improve profitability of feed prices continue to increase as well. It is important to hedge against further increases of feed prices by utilizing hedging strategies that will protect against further price increases as well as provide flexibility to be able to purchase feed at lower prices if they develop. This will be a critical component of risk management this year and one that must not be overlooked.

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.

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