Is a Correction Coming for Class III Milk Prices?

After a slow start to the year, milk prices got a welcome boost after bottoming out in April. These prices are a big improvement from earlier in the year but far from what many producers need to make up for the difficult start to the year.

The announced Class III milk price for April was $15.50/cwt before jumping more than $3 to $18.55 in May. June should climb further, to slightly below $20/cwt.

While third-quarter 2024 Class III futures have been trading in the $20/cwt to $21/cwt range for the past month or so, there are no guarantees that we won’t see a downward correction. Though I can see scenarios where we remain supported at current levels, I see more downside risk than upside potential for the remainder of 2024.

Reasons for the Rally

One of the key drivers of the recent price strength was export demand, particularly for cheese. Ironically, the reason for the export demand was our low cheese prices relative to the rest of the world.

U.S. cheese prices remained at or below the price level of our competitors in the EU and New Zealand for all of 2024 until mid-May. Those multimonth discounts to global markets create opportunity for the U.S. to book export sales in price-competitive global markets. And those export sales tighten stocks in the U.S. and drive up our prices.

Now, however, the question is whether we have priced ourselves out of global markets once again. With cheese in the $2+ range, we probably have. Export sales and their accompanying data releases tend to be lagged, so we may enjoy a couple of months before we realize that export sales have slowed. In the meantime, it’s worth considering how to manage these price moves.

Managing Price Moves

For producers whose milk is primarily priced off of Class III and cheese, $20 might not feel great right now, but it may be the best opportunity we see for the time being. If export sales slow in response to the higher cheese prices, we could see a downward correction to prices.

To remain supported at these levels, we would need to see global prices begin to climb. There are some signs of that happening, with the Global Dairy Trade (GDT) trending upward and some upticks in European prices. This might be enough to raise the floor on U.S. prices, but not enough to catch up to current levels.

Class IV has enjoyed a steadier grind higher thanks to butter. But it’s hard to make a strong case for that to continue other than the momentum of the move. Production is up, stocks are higher than last year, and demand is steady. Entering the heat of the summer, some of the cream that would have been headed for butter churns will instead be pulled into ice cream. That could tighten up markets somewhat, but there should still be plenty of butter to calm fears of shortages in the fall.

Despite declining cow numbers and milk production, farms continue to drive higher component production, adding to the supply of total milkfat. This should also contribute to the available cream and limited further upside potential for butter. Still, the declining cow numbers and milk production paint a picture of constrained total milk supply.

When milk supply is constrained, shifts in either domestic or export demand are enough to swing markets one way or another. These moves could be short-lived, and producers need to consider opportunities to manage their risk through this volatility. While milk prices may not be delivering significant margins at current levels, if those levels are able to be maintained through the second half of the year, lower feed costs should provide some degree of relief.