Cows to Jump Over the Moon
Corner | SATURDAY, October 6, 2012
By Ian Berry
prices, already high, are headed toward a record in 2013's first half.
were made to be broken -- just ask traders in corn, soybeans, and live cattle
futures, all of which hit all-time highs this year.
futures haven't joined that club -- yet. But with dwindling production and
solid demand, it's likely only a matter of time before they do. And the ride
won't be short. In fact, investors can expect to skim profits off milk
throughout most of next year, even though prices might wobble a bit once they
reach the stratosphere. "The bullish elephant in the room is that global
milk-production growth has come to a standstill," says Shawn Hackett, president
of Hackett Financial Advisers, even with prices already near record highs.
Class III milk futures, the benchmark dairy contract, which includes milk used
for cheese, have been at the doorstep of the all-time high of $21.62 per
hundredweight, set in August 2011.
front-month October contract settled Friday at $21.06, up four cents for the
week. It has risen 10% since Sept. 10 and 36% since May.
rise in milk, much like the rally in other agricultural commodities, has been
driven by drought, which is curbing supply. Hot cows are unhappy cows, and
don't make as much milk as they normally would. And output is unlikely to
rebound soon, as soaring feed costs -- due to grain prices also near all-time
highs -- have put a significant squeeze on dairy farmers, making some
California, the nation's top milk producer, output tumbled 5.8% in August from
the level a year earlier. That helped send national output to its first monthly
decline -- 0.3% -- in three years, the Department of Agriculture reported.
Traders also fear that production in New Zealand -- the world's second-biggest
dairy exporter -- will slide, because of hot weather there.
say short-term fluctuations in demand could limit further price gains until the
reality of shrinking milk output really sets in. Robert Chesler, vice president
of the food-service division for brokerage FCStone, sees prices setting a
record and then "snapping back" lower, as some buyers back away.
in a recent report, Rabobank declared that2013's first six months will bring
about "the return of milk scarcity." Any rebound in production would come only
after producers are actually profitable again, predicted the bank, whose
customers include agribusinesses. It expects output declines through next
year's first half, and warns that the market has been "lulled into a false
sense of security" that production will keep up with rising demand in emerging
don't expect China's slowing economy to put much of a damper on milk prices.
China is a huge milk-powder importer, and Chesler says that even if growth
demand there slows to, say, 6%, that would still outpace any likely gains in
the short term, Hackett sees a correction. But after it runs its course, he
expects an even stronger rally in which milk finally "shoots the moon." He sees
prices climbing to $25-$30 a hundredweight next year.