I am pretty positive...
Tuesday, April 30, 2019
Posted by: Lauren Brey
By Phil Plourd, president, Bliming and Associates, Inc.
See if you can be positive.
It’s a request heard more than once over the past few months ahead of speaking engagements and articles delivered to dairy farmer audiences. While not ordinarily given to unqualified, unequivocal, unwavering assessments, I can be pretty positive about a few things…
I am pretty positive…that low prices cure low prices.
The facts are the facts: U.S. and world milk production have been outpacing demand. How do we know? That’s what markets have been telling us just about every day for the better part of two years. But, over time, low prices discourage supply and encourage demand. That brings markets back into balance and paves the way for higher prices at some point.
Of course, getting to “some point” always takes longer than anyone thinks…or wishes. For one thing, no one really rushes to be part of the “solution” by throwing in the towel. For another, we are in a global marketplace, so dairy farmer behavior in Europe or New Zealand or Argentina also factors into the mix.
I am pretty positive…that the worst is in the rearview.
March milk production trailed year prior levels by 0.4 percent, the first year-over-year decline since 2016 and the biggest since 2013. Spot milk prices in the Upper Midwest are well above last year’s levels and the five-year average. Cheese plants are not awash in discounted milk that becomes “extra” cheese. Dairy product inventories are still big, but they are not as burdensome. Milk production is still dragging in Europe and is struggling mightily in Oceania. CME spot cheese prices are up 17 percent year-to-date and 4 percent year-over-year. The April Class III milk price will be up by about 10 percent versus last year, with Class IV running more than 15 percent ahead. Things could be stronger yet in May. Even if we cannot ignite a full-out rally, overarching supply-side conditions in the U.S. and elsewhere in the world should keep markets supported.
I am pretty positive…that a few other things need to happen before the good times really roll.
Simply put, outside markets are not helping the dairy cause. We watch three markets closely: corn, crude oil and currency.
Going back to 2001…When corn prices are between $3.50 and $4.00 per bushel, we count only six months with Class III milk prices above $17 per hundredweight. When crude oil prices are between $45 and $70 per barrel, we find only four months with Class III above $17. When the Euro is trading between 1.05 and 1.25 versus the U.S. Dollar, we see seven months with Class III over $17. As of late April, nearby corn is sitting near $3.50 per bushel.
Feed is cheap, and that ultimately factors into milk production calculus. The Euro is between 1.12 and 1.13 versus the greenback; that’s not great for U.S. dairy exports. Crude oil? It may be the one to bust out as the market trades above $65 per barrel.
I am pretty positive…that we need some help on the trade front, too.
Mexico continues to impose tariffs on U.S. cheese. China is levying tariffs on a wide array of US dairy products. The chances for meaningful, durable milk price strength will improve when we see agreements enacted and tariffs removed.
I am pretty positive…that few in the food industry are having much fun these days.
Fickle consumers. Dying malls. Disruptive startups. Fragmented marketing. Online shopping. Price deflation. Labor shortages. Costly transportation. Trade skirmishes. Agricultural overproduction. Look, “misery loves company” offers little comfort and does not pay the bills. But in our 30 years hanging around the food industry, we cannot recall a time featuring as much upheaval and uncertainty.
I am pretty positive…that the best time to think about risk management is when prices are high.
That seems obvious, but it is not as easy as people think. It’s been so long since markets perked up that we can forgive producers if they don’t immediately focus on downside price protection. But just as low prices cure low prices, high prices cure high prices. So, if prices blossom as summer approaches and unfolds, producers should take a look at forward coverage possibilities.
The new Dairy Revenue Protection program offered under the Federal Crop Insurance umbrella may especially offer intriguing alternatives. Looking and deciding to wait is fine. But the looking is really important.
I am pretty positive…that dairy farmers have more to be positive about than has been the case in a long time.
I know: people mean “be upbeat” not “be certain” when asking analysts to be positive. I enjoy motivational messages as much as the next guy. Who doesn’t like a little Zig Ziglar (“Your attitude determines your altitude!”) or Tony Robbins (“Why live an ordinary life when you can live an extraordinary one?”)?
At some point, being negative – no matter how realistic – is just a bummer for all concerned. It’s not constructive. The good news, and the truth, is that markets are evolving in a way that should make 2019 better than 2018 for dairy producers. And, dare I say, maybe a lot better.
Phil Plourd is President of Blimling and Associates, Inc. and the services division of Dairy.com. There, he leads a team of 15 professionals committed to helping clients find better ways to do business – with coverage including market analysis, risk management, logistics consulting, feasibility studies, strategic planning and more. Blimling serves clients from coast-to-coast in the US, around the world and from farm to fork across the supply chain. Contact him at firstname.lastname@example.org.