Looking for the next gold? Try milk
DAVID PARKINSON - November 9,
2010 5:38 PM ET
the rally in corn prices started to look overcooked,
Shawn Hackett went looking for something more appetizing.
He developed a taste for milk.
Because, he contends, investing in milk is a cheap way
to buy into the corn frenzy – just further down the
have absolutely no interest in the grain markets. Corn
is overpriced now. You can’t make any money,” said the
Florida-based investor and financial adviser. “So why
not buy a secondary market that benefits from these
high [corn] prices?”
Hackett’s argument is that the price for U.S. milk futures
– one of the more obscure and thinly traded agricultural
commodities on the Chicago Mercantile Exchange – should
rise along with corn prices, because the all-important
feed for dairy cattle is chock-full of corn. Yet CME
milk futures have been languishing over the fall, even
as corn prices have spiked to their highest prices since
their record peaks of 2008.
disconnect, he says, presents a huge buying opportunity
in milk – and a way for investors to play the grain
rally even if they missed the bulk of this year’s upturn,
which has added about 65 per cent to the price of corn.
That’s why Mr. Hackett has been loading up on milk lately,
and advising his clients to pour themselves a few glasses,
know everyone wants to buy the grains and I can certainly
understand all the bullish reasons for doing so, but
for me, the milk market is the sleeper bull market where
the real profit opportunity resides and where the risk
versus reward is much more palatable,” he wrote in a
report to clients last week.
got phenomenal potential for upside,” he said in an
benchmark CME milk contract is trading at $14 (U.S.)
per 100 pounds – down from more than $16.50 at the end
of October, and a far cry from the $20-plus prices seen
in 2007 and 2008. The ratio of milk prices to corn prices
is at a 14-year low – which, given the long-standing
historical relationship between the two commodities,
suggests their prices are likely to revert to more normal
relative levels at some point.
was always said that milk is ‘liquid corn.’ But that
couldn’t have been further from the truth the last couple
of years and certainly the last couple of months – at
least in terms of prices,” said dairy broker and analyst
Dave Kurzawski of U.S. futures brokerage firm FCStone
LLC in Chicago.
theorized that the split between milk and corn prices
may have to do with the fact that grains, which trade
globally, have been responding increasingly to international
factors over the past couple of years – while U.S. dairy
products remain largely a domestic market.
milk may be about to play some catch-up. Corn’s rally
this year has pushed dairy farmers’ production costs
north of $20 a hundredweight, leaving them in a highly
unprofitable position – and under pressure to take actions
that will curtail supplies in the coming months.
most drastic measure – which Mr. Hackett believes is
coming – would be a significant culling of the U.S.
dairy herd, as farmers send animals to slaughter rather
than continue to absorb the high cost of feeding them.
He noted that there’s a strong incentive to do that
in the current markets, not only due to the unprofitable
milk prices but also because beef prices are at two-year
even if the dairy herd isn’t drastically reduced, high
corn costs can reduce milk supplies in other ways. Mr.
Kurzawski said that when farmers are forced to switch
to lower-cost, lower-grade feeds, the output from each
dairy cow typically shrinks because of it. This supply
drop may already be in the cards, as cattle approaching
their next lactation cycle have increasingly been receiving
think the damage has already been done,” he said. “We’ll
have to pay for it in the months ahead.”
Canada, milk is for drinking, not trading
may present a tasty investing opportunity, but for Canadian
investors, milk futures are foreign in more ways than
only are all the commodity futures markets for dairy
outside of this country (the Chicago Mercantile Exchange
has traded milk contracts since the mid-1990s, and milk
futures have recently been launched by the New Zealand
Exchange and by NYSE Liffe in Europe), but the entire
structure of Canada's domestic dairy industry precludes
an investment market.
industry here operates under a “supply management system”
– government marketing boards set both prices and production
the marketing structure for milk and dairy products
in Canada, there is no or very limited global trade
of Canadian milk and dairy products,” said Pierre Doyle,
assistant director of the dairy section at Agriculture
and Agri-Food Canada.
attracting potential investors for trading dairy products
would be rather difficult.”
U.S. milk futures market also largely flies under the
radar for Canadian professional and retail investors.
one thing, the supply management system means Canadian
milk prices bear little relationship to the market forces
driving the U.S. milk futures market (though they are,
typically, higher than U.S. prices) – so Canadian producers
have little use for U.S. milk futures as a risk-management
it would hardly be cheap for a retail investor to dabble
in U.S. milk futures. A single contract on the CME –
representing 200,000 pounds of milk – sells for more
Fennell, portfolio manager and senior market strategist
with Lind-Waldock, the retail commodities brokerage
arm of MF Global Canada Co., said the company's Canadian
trading desk does provide trading of CME milk futures
to clients, but he's seen very little interest.
think we did one milk trade in the past year, but we
aren't trading it right now,” he said. “The clients
who do occasionally trade milk futures are typically
Canadians eager to lap up a domestic milk investment,
one possibility is Toronto Stock Exchange-traded Saputo
Inc. (SAP-T37.010.461.26%) – the biggest dairy processor
in Canada and the 12th-biggest in the world.
stock of the Montreal-based company is up nearly 40
per cent in the past six months, and the company's better-than-expected
earnings results last week prompted analysts to raise
their price targets on the stock.
the company's industry-leading profitability, its solid
track record of value creation and the potential for
further operating efficiencies, we believe Saputo deserves
a premium valuation versus its peers,” wrote Desjardins
Securities analyst Martin Landry in a recent report.