Reality is what will be dealt with each day of our lives. We have no idea what milk prices will do in 2021, but we can be assured that there will be volatility. Volatility is becoming greater as time progresses. These wild price swings make it very difficult to run a business relying strictly on the amount received each month from the milk check. That was very evident this year as wild price swings plus negative Producer Price Differentials (PPD’s) created substantial differences in monthly farm income. Negative PPD’s as we have experience were likely an aberration this year and should go away or be minimal next year as butter and cheese prices more closely align with each other.
Optimism for next year may be improving as COVID-19 vaccines are being approved and distributed. However, we need to realize that life will not return back to a pre-COVID normal anytime soon. Yes, it certainly is good that this will save lives and may allow business to get back to normal over time. The food service industry is expected to struggle for a period of time as consumers may remain cautious and businesses may adopt a more mobile environment and possible make it permanent. Many restaurants catered to a significant portion of the business crowd as they when out for lunch or had lunch meetings. It will take some time for trade shows and conference events to be a part of many businesses. To this point, any conference bookings are very limited as people do not know what to expect as we come out of the pandemic.
The current optimism we are seeing with Class III milk prices as futures contracts are in the $17.00-$18.00 range need to be viewed with caution. The recent estimates released by the USDA on the World Agricultural Supply and Demand report should cause one to be concerned and look for opportunities in the market to protect income while at the same time remaining flexible. Frankly, this cannot be done through forward contracting through the milk plant unless they allow you to do options. There were many this year that made the mistake of panic forward contracting through the milk plant in April only to get run over and then deduct the negative PPD’s from those contracted prices and they had no ability to get out of those contracts.
USDA made some of the largest revisions I have seen in price estimate changes form month to month in some categories. Remember, these are just estimates and will be changed, but to make those revisions at this time should cause one to be vigilant. USDA revised the average Class III price for 2021, $1.65 per cwt lower in December to an average of $15.60 and the lowest it has been since 2018. The All-milk price was lowered $1.10 and also the lowest since 2018. The reason for these large revisions is due to continued strong milk production as well as a market that will continue to deal with uncertainty. None of us enjoyed the low milk prices of 2018. The average price for cheese was reduced 19 cents per pound to $1.63 1/2. Butter was reduced 11 1/2 cents to $1.57 on the same report. This would put the average Class III price $2.60 lower than this year and the All-milk price $1.65 lower. You must ask yourself if this is something you can live with. Class III futures are posting an average near $17.40 at the present time and nearly $2.00 higher than the USDA estimate. It is a time to turn optimism into reality and utilize marketing tools to protect income while at the same time allowing for price flexibility. These estimates will change, but it should serve as a wake-up call to be realistic and vigilant.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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