The year 2020 will be remembered in the dairy market history books as the year of volatility. Class III milk contracts have posted more than 30 limit-up or limit-down moves throughout the year. Additionally, the second month continuous contract has traded in a whopping $13.83 per hundredweight range from low to high! All this while fundamentals have shifted from bullish to bearish to mixed. As we enter the end of the year and look ahead to 2021, fundamentals remain more mixed than ever.
A case for a bearish 2021: COVID-19 related shutdowns, U.S. milk production growth, and a weak class IV milk trade are three reasons the dairy market could stay bearish into 2021. The United States experienced statewide shutdowns across the country back in March and April of this year due to rising COVID-19 cases. This had a significant impact on dairy product demand, which ultimately resulted in a sell-off in cheese to its lowest price since 2000. With daily new COVID-19 cases still near all-time highs, additional shutdowns could be coming as the world awaits a vaccine. Another round of shutdowns could see history repeat itself in the dairy market.
Additionally, milk production growth in the United States is ramping up again and could be a detriment to prices moving forward. Production totals for 2020 through October are up 1.92% when compared to production through October of 2019. Milk cow numbers in October were up 43,000 head from a year ago and milk production per cow rose an impressive 37 pounds from last year. Production across the country is strong and fluid milk availability is high. This has typically led to weaker market prices in the past. If the U.S. keeps growing its production like this on a month-to-month basis, the 2021 price outlook will look more bearish.
Finally, class IV milk futures have traded at a significant discount to class III milk futures for the majority of 2020. This discount between the two classes has acted as an anchor on class III and has provided a lot of resistance. Should this continue into the next year, it could deter a rally in the class III trade. Right now, the class IV milk market isn’t showing much promise. So far this year, the spot butter market is down over 32% to $1.3175/lb. Spot powder, meanwhile, is down 12% to $1.0825/lb. Unless demand for these two products changes quickly, 2021 could begin with more of the same.
With the dairy fundamental picture so mixed at this time, it is more important than ever to have a plan in place to protect the price of milk. There is a plethora of tools available to dairymen to use to hedge price risk. Milk futures remain extremely volatile with the market swinging in both directions quickly. Have a plan and be ready to execute when the time is right.
Futures and options trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. This material has been prepared by a sales or trading employee or agent of Total Farm Marketing and is, or is in the nature of, a solicitation.