Milk futures say it’s time to market milk

Class III futures markets are currently offering very good milk prices for dairy producers.

Class III milk prices in 2009 declined 35% compared to 2008, resulting in lost profits and declines in equity for most dairy producers in Michigan.  Milk prices began recovering in 2010 as the annual average Class III price increased 27% higher than 2009 ($11.36/cwt to $14.41/cwt). The milk price recovery has continued into 2011.

As of Friday, February 25, 2011 the Class III futures price average for 2011 at the Chicago Mercantile Exchange (CME) was $16.94/cwt, up 17.6% versus 2010 and almost 50% higher than 2009. Dairy producers should look at current Class III futures prices from a historical perspective. The strength of current prices may warrant consideration of marketing some 2011 milk production using futures, options, forward contracting or insurance programs (Livestock Gross Margin-Dairy).

From 1995 to 2010, annual average Class III milk prices ranged from $9.74/cwt (2000) to $18.04/cwt (2008). The average of the annual averages is $12.91/cwt. Thus, the current 2011 CME Class III futures average is $4.03/cwt above the 16-year average. From a cumulative probability standpoint, the 2011 CME Class III futures average is at the 90th percentile.  This means that, from 1995 to 2010, the average annual Class III price has been higher than $16.94/cwt only10% of the time (i.e., 2 years, 2007 and 2008).  Thus, from a historical perspective the current 2011 CME Class III futures price average is very strong. 

The 2011 CME Class III futures price average softened by $0.37 for the seven trading sessions prior to Feb. 25.  This was somewhat expected since milk prices in February are typically low as February, on average, is usually the second lowest month of the year for dairy product commercial disappearance.  The usual spring peak for national milk production will begin in March. Thus, dairy processors and wholesalers are anticipating increased volumes of milk available for cheese, butter, and powder production.  These normal seasonal factors have made the 16-year average February Class III price the lowest among monthly averages.  Furthermore, historically when Class III prices rise to or above the 90th percentile they rarely stay there long.

A great deal of risk exists in the current dairy markets. Commercial disappearance of U.S. dairy products in 2010 was strong, averaging 3.5% above 2009 and influenced by a strong export market for U.S. dairy products. In 2010, nearly 13% of total U.S. milk production on a solids basis was exported. This has been the major driver for higher milk prices. Even though the export market is good news for U.S. dairy producers, it does create a great deal of risk to milk prices. World trade is quite sensitive to the shocks of world events and the fickleness of world financial markets. Thus, the current strength of U.S. dairy exports could change dramatically and swiftly if a major international political crisis or a dip in world financial markets occurs.  If such circumstances arise milk prices could drop quickly. Although a milk price crash is not expected, it is not out of the realm of possibilities.  Dairy producers must remember that marketing milk is not about hitting the market high, but about controlling price risk and avoiding extremely low prices.

Related Events

Related Articles

Related Resources