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A Canary in the Coal Mine?

Published on Tuesday, March 5, 2019

 A Canary in the Coal Mine?

                               March 5, 2019

Skim Milk Powder (SMP) is often the reserve for all things dairy.  When milk production is abundant, excess supply finds its way to the drier to be converted into the product with the greatest shelf life - SMP.  Supplies grow as milk production remains robust.  That was certainly the story in Europe as the 2016 and 2017 calendars were soaked with record milk production.  Government purchases of SMP built record levels of intervention stocks.  See SMP stocks chart below.  Recent draw-downs of those stocks has helped to provide some lift to prices as they not only have returned to levels above the established EU intervention price, but back to levels not witnessed since 2017.

The story of declining EU intervention stocks has been the primary driver of Skim Milk Powder prices in recent months.  For five straight auctions, the GDT price was anchored by much stronger SMP values.  See GDT charts regarding the index price and SMP prices.  Prices rose 31% over that time period.

However, that came to an end on Tuesday as prices dropped 4.3% to erase much of the gains made in the previous two auctions.  As prices have risen, it appears that much of the earlier demand has been satisfied and prices may have registered a near term peak.  This is not out of the ordinary.  In the last five years, five other such moves took place.  Three of them ended in late February or early March.  Will SMP be a canary in the coal mine?  Surely, all eyes will be on the next auction's performance.

On a positive note, cheddar prices rose to $1.77/lb, giving prices some hope that block cheese can continue the run it started a month ago.  A full view of GDT product results can be seen in the dashboard above. In terms of risk management, an opportunity to add coverage on the recent rally in milk price is still available.  Given the current premium in Class III values over product, this is a worthy pursuit for anyone still exploring near term coverage. Give us a call to sort through strategies that are suitable to your operation.  

Best Regards,
Mike North

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