Rich Posson: Depressed milk prices
It has been quite a while since I last wrote for this column in that late 2008. I decided to reduce the amount of free market commentary due to forecasts for record making financial market swings and with the added task of moving my firm's transactional business to another clearing firm. A transfer had been considered for some time relative what I see as the long term cyclical price trend of commodities if not for the US economy. I believe Vision Financial Markets is best equipped to be in line with these trends that are forecast to extend over the next 30 years.
It was early 2008 and I made a model long term trend call of a bottom for C3 milk price and the market rallied well into May of that year. But from May to July milk lagged other commodities and refused to dial in a high cost of production. In September I informed subscribers the models were correct for an intermediate (intra year) trend rally into spring/summer but were incorrect per a 3yr business cycle long term bottom. The trend had returned to down and on an intra decadal long term basis.
When price traded under $15, milk was under valued per normal recession conditions and yet milk crashed during December to spot $9.32 per cwt --$2.97 below an inflation adjusted price of 1932 a depression year. Clearly milk believes the economy is in depression yet I have not seen a study that states this is the actual economic status. In addition, the milk-to-feed ratio is the worst (grain and milk futures) since 1974 suggesting the market has paid no attention to the cost of production, nor the status of demand in the US, nor the fact grain prices are not in agreement of a depression economic status. Those in control of the cash free market have robbed the farmer from what was not profitable enough price in early 2008 and what is now severely below cost of production.
It seems obvious some people trade dairy products more from a perspective of macro economics than micro, a detriment of dairy producers. The market place has destroyed potential for $27+ for next several years but has not destroyed potential for major recovery in that fundamental and technical research suggests milk is so extremely under valued that we need to invent a new term for extreme under valuation. This market is made of pure nonsense and at least a few of idiotic crowd-styled opportunistic psychological misfits. This price action can not be blamed on public-based speculation, as a majority of speculators are from the dairy production and consumer sectors. However, times may change in that an article about a $300 million hedge fund mentioned milk was on the radar screen!
And now for the good news for the dairy producer. Although I have stated in the past that the three-year business cycle can make or break the business year and is most important with potential for 60% rate of change of price, there are longer term cycles that must be considered. One of those is the decadal or 9yr business cycle that last bottomed in 2003 and last peaked in 1998. The models state that there must be at least a certain number of 3yr business cycles as component of the decadal trend of price. Statistics for this have been derived from more than 70 years of dairy price and near 300 years of price for a variety of commodities. Economist Schumpeter used the Juglar cycle in his models and this is of similar time based performance as the 9yr cycle used my firm's CSA models.