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Guest Columns

Perspective:
Dairy Markets

Navigating volatility in markets: strategies for buyers and sellers

Ronald K. O’Brien II

Ronald K. O’Brien II is managing director of Nui Marketplace North America and is a guest columnist for this week’s edition of Cheese Market News®.

Graphic courtesy of U.S. Dairy Export Council

As stakeholders look to navigate a volatile dairy market, it’s important to consider some of the key market dynamics as well as strategies for success for both buyers and sellers.

• Understanding the dynamics

First, let’s identify some of the key market dynamics at play.

• Cheese market: Low cheese prices are expected to boost export markets, leading to a tighter supply of fresh Cheddar in the coming months. Cheese exports were up 19% year to date (YTD) in September, and similar boom-bust cycles should be expected next year. This scenario creates an opportunity for buyers to lock in spring-fall contracts at current low prices before an anticipated price increase due to fresh cheese supply constraints.

• Plant capacity and milk diversion: The expansion in cheese processing capacity has and will continue to lead to an increased pull on milk supplies traditionally used for Class IV products like butter and powder. This shift not only affects the availability of milk for these products but also influences their pricing dynamics.

• Strong ingredient exports: Exports to our southern neighbor were up 23% year-over-year in September. With these gains, Mexico’s share of U.S. exports increased to 29% YTD and is expected to continue to steal market share. Dry whey product exports, up 9% YTD, continue to highlight how voracious the global market is for high-value protein and how trusted our supplies are and will remain on the world stage.

• Cream and butter segments: Despite salted butter currently being less popular and primarily involved in cash and carry deals, and with the upcoming holiday expected to depress milk prices in the short term, there’s a different dynamic at play for other dairy products. Global shortages in 82% unsalted butter and anhydrous milkfat (AMF) indicate that Class IV milk products might face continued pressure into the future, especially in the U.S. The presence of bovine influenza in Western regions will further strain the supply of Class IV milk.

Additionally, the shift of milk toward cheese production, as forecasted by industry experts, is likely to reduce nonfat dry milk/skim milk powder production by over 100 million pounds in 2025. This redirection, along with other market dynamics, points toward ongoing tightness in both butter and powder sectors.

• Strategies for buyers

Now, I will outline some key strategies for buyers in navigating this market:

• Dairy futures and options: Use these financial instruments to hedge against price volatility. For instance, purchasing call options on cheese can offer protection if prices rise due to increased demand. For buyers of butter or AMF, employing options can shield against price spikes from global supply constraints. While this doesn’t address basis risk, it’s proactive compared to merely hoping for stable or declining prices.

• Secure prices: Enter into forward contracts with suppliers or traders to fix the price of dairy products now, particularly when market analysis indicates a tightening supply due to export demand or production changes. This locks in quality supply at current prices, protecting against future price increases.

• Market priced basis contracts: Use these contracts to secure the dairy products essential for your operations at market prices. This minimizes the risk of basis squeeze. Combine this with a strategic approach to futures and options for optimal risk management.

• Timing the market: Take advantage of seasonal dips in milk supply, like post-holidays or before the spring flush, to purchase either physical products or futures. Prices might be lower due to temporary oversupply.

• Leverage expertise: Use industry resources such as Nui Marketplace North America or Nui INTL to run procurement tenders. These types of platforms allow suppliers and traders to bid for your business, ensuring competitive pricing. While fostering supplier relationships remains crucial, methods like these ensure market transparency and competitiveness, helping suppliers understand what they need to do to secure your business.

• Strategies for sellers

Next, let’s look at strategies for the seller side in navigating the market:

• Inventory management/dairy product holding: Retain dairy inventories like Class IV products until prices improve due to export demand. Recognize the seasonal trends in cream demand to decide optimal times for selling or retaining stocks. Similarly, manage cheese aging strategically.

• Market conditions utilization: Employ futures and options to manage inventory over time, especially in markets with contango (where future prices are higher than current prices). Develop strategies for backwardation (when future prices are lower than current) as well.

• Diversification: Given the market’s volatility, consider expanding product lines or forming partnerships with other processors. This diversification can mitigate risks by not relying solely on one market segment.

• Flexibility: Adopt a flexible sales strategy by agreeing to fixed forward contracts, not just spot market or allocation sales. Look at the market curve to strategically position sales. Ensure you can adapt to meet customer demands, which might be unpredictable or specific.

• Active management: Continuous monitoring and active risk management of sales contracts are crucial. Sales should not be set and forgotten but actively managed for optimal outcomes.

• Risk management tools: Hedge against price drops using derivatives, particularly during periods like the spring flush when milk production peaks.

• Options as insurance: Purchase options to act as an insurance policy for both physical inventory and sales commitments. This proactive approach helps in maintaining financial stability regardless of price fluctuations, leading to more secure business operations and peace of mind.

• Market outlook for 2025

Despite typical seasonal fluctuations such as holiday milk surpluses and the spring flush in the Northern Hemisphere, dairy demand fundamentals remain strong as we approach 2025. There’s notable demand for Class IV dairy products, particularly from international markets, complemented by stable domestic consumption.

Recent data from October on farm receipts indicates a decline in milk production. This trend could lead to a supply/demand imbalance if milk production doesn’t see a significant uptick, potentially driving up prices or leading to increased reliance on imports.

Current favorable margins present an opportunity for dairy businesses to reinvest in infrastructure, technology or efficiency improvements. Such investments could enhance product quality or increase production capacity, thereby strengthening market position.

Meanwhile, the recent political changes and the possibility of new tariffs or trade wars could render earlier 2025 market forecasts outdated. Relationships with key trade partners like Mexico and competitors like New Zealand and the European Union might be strained by new policies from the U.S. administration. This geopolitical tension could significantly impact dairy trade dynamics, making adaptability crucial for market players.

• Conclusion

The dairy market’s volatility in 2025 offers strategic opportunities for stakeholders by leveraging digital technologies in procurement and sales, where real-time data analytics aid in understanding market trends and consumer behavior, facilitating cost-effective sourcing and efficient direct-to-consumer sales strategies.

Financial instruments like futures and options serve as vital tools for risk management, allowing stakeholders to mitigate price fluctuations. Furthermore, strategic timing of market entries or exits, enhanced by digital insights, can optimize operations and market presence. This adaptability enables businesses to innovate,

potentially exploring new products or markets during surplus periods, thus turning volatility into an avenue for growth and sustainability.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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