Just as U.S. dairy markets were settling in for what appeared to be a long and pronounced downturn, prices reversed course heading higher at the end of January. Butter and nonfat dry milk (NDM) led the price rise on news from Fonterra revising its 2014/15 season milk production forecast from 2% higher to 3% lower. Suddenly a market that appeared well supplied felt extremely tight. Buyers, sitting on the sidelines awaiting further price declines, quickly felt the need to increase ownership of butter and NDM at spot prices. U.S. sellers, caught off guard by the rapid run-up in spot prices, pulled offers until they could reassess their situation and likely try to determine what market signal they might have missed. The combination of buyers looking to increase purchases in a shortened time-frame and panicked sellers retreating from the markets became a self-fulfilling prophecy as domestic markets indeed became constricted. The question remains, was this price move an indication of what is to come or was it simply an overreaction to data leading to a short-term anxiety running through the markets?
The latest move higher could be short-lived according to the NDM futures trade at the start of February. Given the spot trade activity it appeared concerns about a more balanced NDM and skim milk powder (SMP) market in 2015 lifted CME NDM futures last week. However, NDM open interest declined for both futures and options at the beginning of February, by 429 and 591 contracts, respectively. Decreasing open interest typically indicates that money is leaving the market suggesting that participants were cashing in on positions and that the current price uptick may not last. That said, Q3 and Q4 2015 NDM contracts continue to have good buying and selling activity with 893 NDM futures, and 466 NDM options exchanged hands the first full week of February.
Butter futures revealed a similar sentiment. Cash-settled butter futures and options open interest were 6,348 and 5,885 contracts, respectively on Feb. 3. As of Feb. 9, butter futures and option open interest had declined to 5,735 and 5,412 contracts, respectively. A signal that the price move was likely temporary as market participants exited positions. Based on recent spot cash-butter markets, that was indeed the case. Spot butter prices gained 30¢ per pound between Jan. 23 and Feb. 4. Since then, butter markets have retreated 10.5¢ with signs of further price weakness ahead.
However, market direction could be far more complicated than CME futures open interest. Internationally, skim milk powder (SMP), whole milk powder (WMP) and butter prices are climbing. It appears buyers could be viewing current spot prices as a good value and possibly some of the lowest prices of 2015. Last week, German SMP price ranged from €2,000/MT to €2,010/MT, 5.7% from the prior week. Similarly, Dutch SMP prices reported Feb. 4 averaged €2,000/MT, up 7% from the prior week. New Zealand’s SMP prices were $2,600/MT last week. Adjusting to US dollars, this brings international SMP prices between $1.03/lb. and $1.18/lb. – prices supportive to current domestic NDM markets. Overall, the data suggests that global buyers may be comfortable with milk powder prices between $1.10 and $1.20 providing a good opportunity for U.S. manufacturers.
Globally, dairy producers are facing the stark reality of significantly lower milk prices in 2015. In reaction, dairy producers around the world could begin culling their herds due to lack of profitability, feed and in some cases to avoid super-levies in Europe. As an example, Ireland dropped December 2014 milk production 16% below the prior year levels in order to curb milk production ahead of the final quota super-levy calculation period. While China’s milk production in 2014 sailed ahead of 2013 levels, China’s dairy producers were not immune from price declines. China has one of the highest dairy-cost models, a model that has been challenged as of late. Most recent reports suggest that China’s domestic milk production in January 2015 was 6% lower than a year ago. Add to this the uncertainty for the end of season in New Zealand due to both weather and extremely low pay-price estimates. All totaled, it makes sense that buyers have stepped off the sidelines and have started to increase ownership at current prices to avoid risk of higher prices later in 2015.
What does the latest price move tell us? U.S. buyers may not have had much coverage at the start of 2015 expecting much lower prices ahead. This latest run suggests buyers are working to take some uncertainty off the table in 2015. There are still several items that could take markets higher as well as lower. That said, the downside potential of U.S. dairy markets looking far less and possible upward movements looking far more risky. Most of the drivers of 2015 milk and dairy product prices are out of the hand of mere mortals – with geo-political risk, end of EU quota, Mother Nature, and trade pacts topping the list of items that could sway 2015. Likely the latest market move was a dose of reality as to how volatile dairy markets continue to be and the potential they have going forward.