It certainly has been interesting to see the optimism that has been prevalent in Class III futures since May 23rd.
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There is uncertainty surrounding the impact a recession could have on milk prices. Dairy demand may perform better than other areas, but slowing demand might pressure milk prices. (Taylor Leach)

Nearby contract months in futures had moved over $1.00 per cwt from low to high even though cheese prices declined. Block cheese price declined 12 1/2 cents while barrels declined 10 1/2 cents over that period of time. The last half of the week from June 6-10, Class III futures showed some weakness as underlying spot prices showed weakness.

This shows the optimism that has been prevalent in the market. Milk production running below year ago levels, cow numbers less that a year, a tight replacement market and a high cost of production was anticipated to keep milk prices high with the potential to increase further. It almost seemed as if the strength of Class IV futures was spilling over into Class III. It made one wonder if traders were trying to make Class III milk futures the leader of cheese prices hoping that strength of futures would increase the desire of cheese buyers to step up more aggressively before prices move higher. If this were the case, it would be the first time this would happen. Milk futures either anticipate where prices might be going or follow where prices have gone. Futures are not the price discovery mechanism; daily spot trading is. Class III milk futures have anticipated where cheese prices were going, but so far that has not taken place.

Class IV futures have been a different story due to increasing underlying butter and nonfat dry milk prices. Class IV contracts have been in a steady uptrend making new highs repeatedly. The demand of butter has been strong both domestically and internationally. Production has been sufficient for demand and to increase inventory from month to month. However, inventory has not been able to build beyond the levels of last year. This has provided strong support under the market. However, some of this demand might be slowing as there have been some reports of reduced retail demand. There are also some initial indications that restaurant traffic is slowing due to inflation and continued fuel price increases. This may impact dairy demand if this continues.

There has been much discussion over the impact inflation and a possible recession will have on the demand for dairy products. The most recent recession that took place was over a short duration from February through April 2020 and was due to COVID-19 and the restrictions that took place closing much of the economy down for a short duration. Milk prices initially fell but then rebounded quickly as consumers turned to dairy products as the emphasis turned to a healthier diet. But what about the impact on dairy demand during a longer period of recession that is the result of a wide range of economic issues? For a better comparison, we can look back at the Great Recession that took place officially from December 2007 through June 2009.

Reports released on June 10th showed rampant inflation and historic low consumer sentiment. The chief investment strategist, Michael Hartnett, for the Bank of American said, “We’re in a technical recession but just don’t realize it”. The Michigan Index of Consumer Sentiment registered 50.2, the lowest since 1978. Along with this, the Consumer Price Index increased 8.6% and the fastest rate since 1981. Now, it is not certain the country will move into a recession or if that may still be avoided. However, looking at the current numbers, it looks more like a possible recession is likely.

So, back to the question as to what it would do for dairy demand and milk prices. I looked back to the 2007 to 2009 recession to see what happed to milk prices. The chart below provides a vivid indication of what could happen. I compared both Class III and Class IV milk prices during the period and it does not paint a positive picture.

We must remember that it is unclear whether there will be a recession and if there is one, it is uncertain as to when it could begin or how long it would last. But a recession most likely would have an impact on demand. Lower milk production with reduced demand will not support higher prices and that is what each farm will need to guard against. Time should be spent on building a risk management plan. If you need assistance with a plan, please contact us.

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

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in trading commodity futures and options on futures. It may not be suitable for everyone. This material has been prepared by an employee or agent of JSA and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.

Farmer organisations have called the proposed changes to the code of welfare for dairy cattle as big, complex and overly prescriptive.

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