Why we’re wary of high futures prices

Hoard's Dairyman: 

Why we’re wary of high futures prices

Date: 
Fri, 01/21/2011

Do you watch daily Class III milk futures prices at the Chicago Mercantile Exchange? We do. While it’s exciting to see rosier financial prospects for the industry in 2011, we’re skeptical . . . and wary. There are a few reasons why:

First are the prices themselves. At Tuesday’s close, the Class III average for 2011 was $15.71; every month beginning in February was over $15, and every month beginning in June was over $16. Just before Thanksgiving, prices averaged only $14.41. Frankly, a jump of $1.30 seems like a huge move without something bad happening on the supply side of things – and if something bad did happen then we didn’t hear about it.

Second, $15.71 would be the third highest Class III price average in history. Third, a year with prices over $15 for 11 months in a row has only happened once before. Given the ultra-volatility dairy producers have seen in prices the last decade – from a despairing low of $8.57 to a dizzying high of $21.38 – we wonder if that much stability is too good to be true.

Admittedly, part of our concern comes from worrying that feed costs may turn out to be so high – especially for producers who don’t grow their own feed – that even a $15.71 Class III average wouldn’t be enough to make a profit. With $90+ oil and $6+ corn, high feed prices are a certainty, and our suspicion is that milk production costs will be in the $16 range this year.

Traders at the CME obviously believe that demand for milk will be strong this year, and we hope they’re right. The U.S. is coming off its biggest dairy products export year in history in 2010 and economies around the world are supposedly recovering even faster than ours is. Hopefully, both will continue and keep demand ahead of supply.