May Day and Mayday? There are always pros and cons

By Kurt Petik, senior relationship manager, Rabobank

Spring should come without delay

We hope and pray

If not today

At least by May!!

A few weeks ago, as record snowfall was hitting our office in Wisconsin, I couldn’t help but think that the calendar’s outlook must be wrong. Certainly, May Day could not be in two weeks!

May Day baskets, spring festivals, the rebirth of Mother Earth, flowers from those April showers…

“Not a chance!” I thought to myself as snow was falling and news of roofs collapsing kept coming. It seemed more like “Mayday, mayday, mayday.”

So, what does this have to do with the Dairy Market Outlook? Maybe nothing! But I will tell you that every market outlook needs to consider both the pros and cons, or in today’s illustration, “May Day” and “Mayday.”

Although not perfect (like using the calendar to predict the seasons), the Class III milk futures are still a sound basis for the dairy market outlook. This is an avenue that brings together buyers and sellers. The executed trades, and thus the price set, may not reflect everyone’s sentiment. However, at least it confirms that two parties with opposing interests are willing to agree on a price.

As of April 18, the average price for the second half of 2018 was trading at about $16.20. The market is currently in a nice uptrend as the six-month average has increased 4.5 percent since January 1. Even more optimism is seen as the July-December average price is 17 percent higher than the first quarter Class III average of $13.86.

So, May Day is here and I forecast that May will be warmer than February. I will also forecast that fourth quarter 2018 milk prices will be higher than first quarter’s. But what we really want to know is: Will May be warmer than it is expected to be? Will December milk be higher than the $16.20 futures price? That is where all of the factors of May Day festivals and Mayday distress calls play into an outlook. I have the luxury of borrowing some information from Rabobank’s global team of analysts. Here are some things I found:

May Day Baskets to support a stronger dairy market outlook:

• The global economy continues to show broad-based growth, supporting demand.
• Despite trade war buzz, U.S. exports are actually up in 2018.
• New Zealand production has been hampered from drought conditions.
• EU intervention stocks have been selling, helping to clear inventory.
• Tight margins are resulting in slower production growth throughout Europe, Brazil and Argentina.

Mayday, Mayday, Mayday threats of depressed prices:

• U.S. milk production continues to grow, albeit at a slightly slower trend than last year.
• Production growth has continued in all major export regions, absent New Zealand. The EU has led the charge with 4.4 percent growth in the first quarter.
• Dairy commodity stocks are high. Here are some year-over-year comparisons as of February 2018.
  • Cheese up 7 percent (1.31 billion pounds of cheese!)
  • Butter up 2.6 percent
  • NDM up 24 percent
  • Whey up 26 percent
• Trade war threats & NAFTA negotiations.

I may have disappointed you by not making a bold milk price prediction for the rest of 2018. An outlook is just a view from a particular place. Your view of your farm needs to include the reality that prices are not predictable. For every May Day, there is a Mayday. Industry knowledge, market trends and global insight are all very important to the management of your dairy today. But please remember that reading a market outlook is not developing a marketing plan. It is critical to develop and execute a marketing plan that manages a level of price risk that you can afford to bear.

 Source: Rabobank 2018. Includes NZ, EU, US, Australia, Argentina, Brazil and Uruguay