Better Prices Spur Production – and Forward Thinking
Mar 19, 2010
By Robin Schmahl, AgDairy LLC
In recent years, markets have become more responsive to price because of the ability for production to change much quickly than before.
In the past, a trend change in the markets took awhile to unfold. Once the production train picked up steam, it took a while to slow it down. When milk supply was tight, it took some time for it turn the corner to bring the supply/demand balance back in line.
The same held true for grains and livestock. Obviously, cows can only calve once per year and it takes approximately two years to bring a heifer into the milking her. It seems, however, that a swing in the supply/demand balance can take place sooner than it once did. We do not have to look far to see evidence of this.
Last year was a tough year for producers with milk prices below the cost of production for much of the time. Cow culling increased as farmers needed to trim the herd to cut costs and provide some cash flow. CWT had a hand in the higher culling numbers, taking out approximately 252,405 head in the span of a year under their herd reduction program.
This, along with some improvement in the export market, began to support cheese and butter prices. This change translated into improving milk prices at the end of 2009 and a better price outlook for 2010. This was great to see as prices had been too low for too long.
As the price outlook turned brighter, however, so did the desire to push milk production and make up for lost income. More heifers already were waiting in the wings to be assumed into the milking herd. Many farmers began adding cows and pushing production in order to take advantage of the better prices.
This resulted in a faster turnaround in the market. Milk production in February increased 0.1% over last year. This may not sound like much, but it is the first time production increased over the previous month since July 2009. There were 3,000 cows added in February to the national milking herd and, for the second consecutive month, cow numbers increased. The milk production report showed production per cow 35 lbs. higher than a year ago.
February’s milk production report released last week showed a production decline in 10 of the top 23 states with five of those being Western states. Many Midwestern and Northeastern states posted increases in production over a year earlier.
The point is that farmers can react more quickly to prices than they did years ago. I know dairy farmers cannot change milk output simply by flipping a switch or cannot raise replacements on demand, but the production swing takes place more quickly.
Lending has a lot to do with the ability to make changes. There are lenders that are willing and/or requiring farmers to use the markets to hedge milk production and feed. They know that hedging a price that covers costs will allow bills and loans to be paid, and they are willing to set up marketing accounts. There are many lenders, however, who will not set up a marketing loan because they do not understand marketing, or have a directive to not lend any more money.
Now, I anticipate some discussion as to how a price can be hedged to cover costs. Near-term contracts do not offer this at the present time, but they did at one time. All you need to do is look back and see where these contract prices have been. For example, the March contract is currently trading at $12.80/cwt. It traded around $15.50 five times in 2009 and spent over four months above $18.00 in 2008.
Today, marketing requires forward thinking and not just focusing in the near-term. Profitability needs to be identified, and marketing plans and tools need to be implemented to protect those prices. The same is true for protecting feed prices.
Those who purchase feed should watch what is happening in the grain markets. The overall trend of grain prices is sideways to lower. Corn exports are slowing and soybean production is South America is regularly being revised higher.
I recommend purchasing feed needs in increments as prices decrease. If soybean meal prices fall below $260.00 per ton, some needs should be covered. Corn prices falling in the range of $3.70 per bushel basis the July contract should trigger a buy. The weather market is ahead and a lot can happen to spur price volatility.
- February Cold Storage - March 22
- February Livestock Slaughter - March 26
- March Agricultural Prices - March 30
- Consumer Confidence - March 30
- Commercial Disappearance - March 30
- Dairy Products report - April 1
- California Class 4a/4b prices - April 1
- Fonterra Auction - April 1
- March class price - April 2
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions