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How to Invest in Milk: Futures and Stocks

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Milk is a consumer staple that is often thought of as a household item rather than a commodity investment. Nevertheless, milk can be a lucrative commodity as it offers a play on consumption trends as well as the state of the overall agricultural world. Interest in milk as an investable asset is not nearly as significant as desire for other agricultural commodities, though investors seeking exposure to have multiple options available to them.

For some commodities, such as crude oil, it’s possible to gain indirect exposure through an investment in companies that are engaged in production or extraction. This is challenging in the case of this particular commodity because there are few publicly traded companies engaged exclusively in the production and distribution of milk.

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There are, however, some options available. The largest in terms of market cap is Groupe DANONE (DA), which is based in France. Other options include Dean Foods Co. (DF), Wimm-Bill-Dann Foods (WBD), and Synutra International Inc. (SYUT). These stocks will seldom move in lock step with milk prices, but may be an interesting option for certain investors.

There are actually a wealth of futures and options to play milk including class III and IV milk, international skimmed milk powder, and even non-fat dry milk futures and options. There are also a number of other dairy futures offered on the CME. There are also a number of other dairy-based futures offered on the same exchange that will grant indirect exposure to milk prices.

EU could supply close to 35per cent of the increase in global dairy demand by 2030. Global trade in dairy products will grow at a significantly slower pace between now and 2030 than in the past decade, the outlook report by the European Commission has said. However, growing world import demand driven by population growth (notably in Africa) and income growth will drive higher consumption of dairy products over the outlook period.

The EU and New Zealand will lead the export market. There will also be more of a focus on added-value products. In addition, consumer preferences for differentiated products (e.g. organic, GM-free, pasture-based, local) will drive the development of alternatives to conventional production systems. Environmental requirements will also play an increasing role in shaping production systems.

By 2030, world milk production is expected to exceed 1 billion tonnes, increasing annually by more than 15 million tonnes, slightly faster than in the last decade. More than 40pc of this increase should take place in India, which is continuously investing in large modern farms and infrastructure. However, India is expected to trade on the world market only in exceptional market conditions (e.g. export subsidies for SMP because of high stocks, as observed in 2018). 

Just as crucial to producers, the national milk-feed ratio, which rates raw milk prices against feed and forage costs, has climbed to a friendly 2.4, up from around 2.0 and 2.1 through 2018 and much of 2019. Feed and forage costs are typically around 70% of total operating costs. Meanwhile, last week USDA projected a 13% bump for farmers’ 2019 milk receipts, pushing them up $4.6 billion and to their highest in recent years. Looming over dairy’s economic situation in 2020 is the persistent expansion in milk production. USDA projects the national herd will remain around 9.33 million milking cows, but continued increases in milk output per cow will boost total production by a like percentage, to more than 222 billion pounds next year.

That expansion has come despite a reduction in U.S. milk cow numbers, owing to weak milk prices, severe weather disruptions, and dairies selling out. While export demand worldwide has been strong, U.S. production of milk solids per cow “has been going up so fast’ that there are increasing odds production could exceed demand. Larger producers, who tend to have lower costs, are getting a break because of the higher milk prices and continued moderate feed prices. 

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