Dairy Processing - January/February 2022 - 59

and increasingly tight environmental
restrictions (in the EU and New
Zealand) are all contributing to
the slowdown in milk production.
While less milk typically means less
production of all dairy products,
butter and NFDM are getting hit
extra hard.
Typically, processors who are
bottling milk and making semiperishable
dairy products like
yogurt and ice cream receive the
milk they need. Next up are cheese
plants, which often have contracts
requiring cooperatives to deliver a
minimum number of loads of milk
each day or week. Whatever milk
is left over after all those other
uses typically ends up in butter
and NFDM. As an example, in
November, cheese production was
up 1.6% from the previous year, but
NFDM production was down 15%
and butter production was down
9.6%. The demand side is mixed, but
even with mediocre demand, a 10%
or 15% decline in production is going
to push prices higher.
The higher dairy product prices
are translating into higher farm gate
milk prices, which will more than cover the
increased costs that farmers are facing. We should see better
milk production growth, but it probably will not develop
until the second or third quarter. But those higher costs and
environmental restrictions probably mean we're not looking
at a massive wave of milk like we've seen in the past and
prices are probably going to stay above long-run averages
CME SPOT BUTTER AND NONFAT DRY MILK (USD/LB.)
$3.60
$3.10
$2.60
$2.10
$1.60
$1.10
$.60
Jan 14 Jan 15 Jan 16
Butter
Nonfat Dry Milk
Jan 17 Jan 18 Jan 19 Jan 20 Jan 21 Jan 22
Price of butter and nonfat dry milk from 2014 to 2022.
High feed costs, a tough time finding
labor, escalating operating costs,
adverse weather in some places and
increasingly tight environmental
restrictions (in the EU and New
Zealand) are all contributing to the
slowdown in milk production.
through 2022. If weather, or other factors, keeps production
restrained, then the market could stay strong and volatile.
In the United States, most ice cream makers are operating
in areas that are covered by Federal Milk Marketing Orders
(FMMOs), which set a minimum price for milk each month.
Milk going into ice cream is classified as Class II milk. Just for
reference, milk that goes into a bottle is Class I. Milk going
into cheese is Class III and milk going into butter and NFDM
is Class IV. There are actively traded futures contracts on the
Chicago Mercantile Exchange (CME) for Class III and Class
IV milk, but they do not have a Class II contract for ice cream
makers. But Class II milk derives its value, through a formula,
from the price of butter and NFDM and the CME also has
active futures contracts for butter and NFDM. It is possible
to create a good hedge for Class II milk using the butter and
NFDM futures so that an ice cream maker can lock in a fixed
price for at least some of their inputs.
With the rally that we've seen in the market, ice cream
makers might not be excited about locking in current prices,
but now is the time to start exploring risk management so that
you can lock in your milk prices when the market is offering
prices that work in your budget.
Editor's note: This material should be construed as
market commentary, merely observing economic, political
and/or market conditions, and not intended to refer to any
particular trading strategy, promotional element or quality
of service provided by the FCM Division of StoneX Financial
Inc. ( " SFI " ) or StoneX Markets LLC ( " SXM " ). SFI and SXM
are not responsible for any redistribution of this material
by third parties, or any trading decisions taken by persons
not intended to view this material. Information contained
herein was obtained from sources believed to be reliable, but
is not guaranteed as to its accuracy.
Nate Donnay is the director of Dairy Market Insight
at StoneX and has been applying his interest in large
complicated systems and statistical analysis to the
international and US dairy markets since 2005.
DAIRYPROCESSING.COM | JAN-FEB 2022 59
Source: CME
http://www.DAIRYPROCESSING.COM
Dairy Processing - January/February 2022

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