Milk Prices Likely to Rise in 2016
By Simon Constable - October
3, 2015 8:40 AM ET
The recent drop in prices isn’t expected to last much longer as farmers start to thin their herds. Traders could profit.
It could soon be time to lay off the latte
and, for that matter, grilled cheese sandwiches, too.
Why? Because milk prices are set to rally next year.
In case you forgot, cheese is made from milk.
Recently plummeting U.S. milk prices mean it doesn’t
pay for farmers to maintain the highest quality milk
production of their dairy herds. As a result, herd size
is set to drop and production with it. It’s a problem
that could take years to work out. Still, there’s a
chance for traders to profit.
November-dated futures prices for class III milk have
been sliding for much of the year, trading Friday on
the CME at $15.61 per hundred pounds, down from more
than $17 in early June. Class III milk is primarily
used in the manufacture of cheese, according to the
U.S. Department of Agriculture. In 2014, prices were
in excess of $20 per hundred pounds for the first 11
months of the year, says the USDA.
It’s that dramatic drop in revenue for selling milk
that’s making the maintenance of the cow herd unprofitable,
says Shawn Hackett, author of the Hackett Money Flow
Commodity Report. He predicts that the U.S. herd will
start to fall around January of next year.
Already, the growth rate in milk production is slowing.
For the year through August, production has inched up
by 1.4%, compared with a 2.4% rise during all of last
year, according to Barron’s analysis of USDA data. In
other words, production growth is off about 40% from
SLOWING GROWTH OBVIOUSLY is not the
same as declining output. We get from slowing to declining
through farm economics. It works like this: Farmers
make decisions on adding cows to the herd based on whether
it pays to do so. Unfortunately, the economics argue
against the heifers. Cow prices have jumped after a
drought a few years ago led to declining herds. Meanwhile
milk prices have fallen. The price of a replacement
cow was $1,970 during the second quarter, versus $1,440
in the first quarter of 2014, according to the USDA.
Or, put another way, the farmer must pay a third more
for a cow that will provide a lot less revenue. That
may not make sense for some farmers. On top of not adding
to the herd, cows that cease to produce milk may simply
be sold off and not replaced at all. Ultimately, the
result will be a lower herd size and declining production.
At that point, milk prices could rise again and traders
can make a profit.
Although prices for cows were high in the second quarter,
coming figures will probably show they have retreated.
Cow prices are related to prices for the live cattle
traded on futures exchanges. The good news for farmers
is that futures prices for the latter have dropped about
20% since early July. It means the economics will start
to improve. But as Hackett says, “Nothing happens overnight
with live animals.” Just because cow prices have dropped
doesn’t guarantee we’ll see an instant increase in the
Hackett says it could take two years to see an expansion
of the U.S. herd. In the meantime, milk prices could
rally as early as next year to as high as $18 per hundred
pounds, or about 15% above recent prices, which Hackett
says is workable for producers and consumers alike.
Maybe not for latte lovers, though.