Thanks to a government cheese buying program in the aftermath of COVID-19, milk futures enjoyed an astonishing $10 price rally from mid-April until mid-July. Front month Class III futures prices tested $25.40 contract highs not seen since 2014.

That triumphant rally has stopped as the government support mechanisms are on pause for the moment. Because of this, lower cheese demand has become an issue, and we’ve seen a large amount of inventory flood the market over the past few weeks. The block/barrel average now stands at just $1.630/lb. after trading near $2.70/lb. about a month ago.

Also weighing on price is a hefty supply of milk, as reiterated in the most recent milk production report released yesterday from USDA.

According to the report, “July Milk Production was up 1.5 Percent. Milk production in the 24 major States during July totaled 17.8 billion pounds, up 1.5 percent from July 2019. June revised production, at 17.5 billion pounds, was up 0.8 percent from June 2019. The June revision represented an increase of 59 million pounds or 0.3 percent from last month's preliminary production estimate. Production per cow in the 24 major States averaged 2,016 pounds for July, 19 pounds above July 2019. The number of milk cows on farms in the 24 major States was 8.83 million head, 44,000 head more than July 2019, and 2,000 head more than June 2020.”

Plentiful supplies

The plentiful supply of milk will continue to weigh on prices as short term demand is perceived to be down. Meanwhile trade is eagerly watching the progress of “back to school” across the nation. With many schools opting to go virtual for learning, the normal demand the dairy complex sees in August and September is lower than years past.

USDA daily comments agree saying that, "Food service orders are below than average for this time of year."  September milk futures contracts are already reflecting that reduced demand as the contract is now trading at $15.32, down from the summer high of $21.71. 

Quite frankly, a re-test of the March low seems likely with a price target of $14.51.

Export impact

From there it seems likely that milk futures will find firm footing. The value of the dollar continues to inch lower, which will continue to help dairy exports. According to U.S. trade data from the U.S. Dairy Export Council, “U.S. dairy exports in June were up 28% by volume and 22% by value. In June, U.S. suppliers shipped 206,411 tons of milk powders, cheese, whey products, lactose and butterfat, the most (on a daily-average basis) since April 2019. Cheese exports in June were 38,427 tons, 29% more than last year and the most over. Much of this volume represents deals booked in April and May when U.S. cheese prices were at historic lows.”

With the dollar still dropping, overseas demand expected to stay firm, and a potential additional round of government buying around the corner, this recent setback for milk futures may only be temporary.

Reach Naomi Blohm: 800-334-9779 and [email protected]

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.