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Dairy Weathering the Storm

Jun 22, 2020

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The effects of the COVID-19 pandemic have continued to be seen over the last several weeks. The long-term, ongoing effects have not yet been fully understood or revealed and could drastically change the way many businesses operate.

The unknowns surrounding the viral outbreak have had a significant impact on many global markets. Stocks, bonds and currencies have all experienced heightened volatility due to the outbreak and recent trends have the potential to continue unless a vaccine is found quickly or some other method for stopping the virus is identified.

Although many of the most popular markets (according to trading volumes) have been significantly impacted by the spread of COVID-19, other markets have also seen rises or declines due to the virus. The milk market, for example, has seen a strong trend higher in recent months that could be wholly or partially attributed to the spread of the virus.

Since finding a bottom in May, the class III milk market has been surging higher on a very strong upward trajectory. The futures contract has moved from under 14 to over the 21 level in a matter of weeks and could be poised for further upside in the weeks ahead. Of course, how the market fares may be a matter of how the outbreak is contained or not contained in the near future.

If the viral outbreak takes a turn for the worse, it could set the stage for a massive rally in both dairy contracts but other hard assets as well. The Federal Reserve is trying to do its part to keep the economy afloat, although its methods could eventually lead to significant inflation down the road.

Although the recent rally in some dairy markets has been impressive, it is still too early to tell if strength will be sustained. The reopening of the global economy may point the markets in the right direction; however, it will take some time to determine the long-term effects of the virus and the corresponding economic shutdown.

Once restaurants, bars, hotels and other related businesses have been open for a period of weeks or months, the actual long-term damage may become more clearly visible. Until that time, markets could remain in a state of flux that could see rising volatility and larger price swings, oftentimes not seeming to make much, if any, sense.

With a strong uptrend in place, the smartest way to play the dairy sectors may be to trade with the prevailing trend higher, until proven otherwise. The next several months could point to other opportunities, however, as more becomes known about the virus and the world’s ability to contain it.

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DISCLAIMER: This document is issued for informational purposes only. This document is not intended, and should not under any circumstances be construed as an offer or solicitation to buy or sell, nor as financial advice or a recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Trading commodity futures and options products presents a high degree of risk, and may not be suitable for all investors. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.  The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.