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 bullish 2021:
Export demand, government product purchasing on the open market, and high feed costs are three reasons the dairy market could stay bullish into 2021. The United States has moved a lot of product this year via exports. A weaker U.S. Dollar and low product prices in March and April have helped to increase global demand for U.S. dairy products. So far this year, the U.S. Dollar is down over 360 points from last year’s close. In terms of total dairy exports, through September the United States has exported 12.62% more volume than a year ago.
Additionally, the fact that the government is purchasing dairy products on the open market is helping to keep inventory levels down. This year saw the government do four rounds of product buying for the Farmers to Families Food Box program. A good portion of the funds set aside for purchasing went to the cheese market and helped drive spot cheese to a new all-time high. Should this government buying continue into 2021, cheese could hold over the $2.00/lb level and could keep demand high for milk futures. As of now, the USDA has announced product purchasing will continue through December 31, 2020.
Finally, the high feed costs right now with over $4.00 per bushel corn and near $400 per ton soybean meal could help to slow milk production in the coming year. Historically, higher feed costs have had a negative impact on how much milk is being produced monthly. The higher feed market also helps to support better milk prices. With world export demand strong for U.S. corn and soybeans as well as weather uncertainties out of South America, these high feed prices could hold well into next year. This could help keep milk production totals in check.
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.