AgDairy Market Update
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He provides dairy market insight.
Milk Production Continues to Remain Strong
Jun 21, 2009
By Robin Schmahl
How long can we hold on? That is the question running through all dairy farmers minds.
The last time we went through the first half of the year with prices below $10.00 was in 2003. Once the calendar moved into the second half of the year, prices rebounded above the $14.00 level before falling back to $11.00 by the end of the year.
The current future market outlook is not so kind as the highest price seen through the end of this year is in the mid-$13.00s. Even that price is below most producers’ cost of production. A big difference between this year and 2003 is the significant increase in the cost of production making it extremely difficult and impossible to cut costs enough to maintain profitability. Of course, this is in and of itself without any forward pricing of milk. Those who took advantage of prices the futures market offered last year and earlier this year are in a much better position than those who did not. Of course we cannot turn the clock back, but need to move forward and do what needs to be done.
So how long will milk prices remain low? Well, recent history would suggest prices would remain low for about a year before stronger prices would be realized. If this is the case, prices will remain low for another six months or so before stronger prices will be realized. This is not welcomed news as another six months of this would be devastating. However, seasonality and historical cycles seem to be a thing of the past due to changes in the dairy industry and markets.
Cheese and butter buyers are purchasing when they feel they need to rather than when they seasonally did. They are not opposed to paying for storage for a longer period and would rather do that than chase the market higher when supplies are tighter. Dairy markets have been more global in recent years and this has had a large influence on prices.
The U.S. dairy farmer is not alone in the struggle of low milk prices. All dairy exports and demand from other countries have fallen significantly. Protests over low milk prices have erupted in other countries. Last week, a procession of 500 farmers on tractors drove their tractors into Brussels before a European Union summit was to commence. Traffic in the city was clogged causing chaos. They were protesting low milk prices and demand more be done in addition to what the EU has already done. Their subsidy program was re-instated earlier this year as well as increasing raising the ceiling of the amount of dairy products that can be put into the public intervention program.
It was anticipated low prices along with another CWT herd retirement program would have tightened milk supply and supported prices somewhat by now. However, the opposite is true. Milk production continues to remain strong with USDA’s latest milk production report showing May production in the top 23 states still showing an increase in year-over-year production. Production in these states increased 0.2% with U.S. production up by 0.1% despite the fact that there are 43,000 less cows in the country than a year ago. Increased production per cow and lower demand is causing a backup in manufacturing facilities. There are trucks waiting upwards of 18 hours to unload at facilities before they go out and pick up more milk. There have also been farmers that have dumped their milk due to the fact that the plant cannot pick it up before the next milking and the tank is full. Plants are paying the farmers for the milk, but directing them to dump it until such time as they can pick it up.
Desperate times are calling for desperate measures, and farmers are doing what they can to survive. Cash grain farmers were looking at a similar situation late last year with higher fertilizer, fuel, and equipment prices indicating returns below the cost of production.
That has changed with the surge in grain prices this spring. However, the price has run its course and those who have not hedged any production will likely risk selling their crop below the cost of putting it in. The same goes for dairy producers who planted crops to feed the cows. It costs money to plant that crop and even though you will be feeding it, the worth of the crop needs to be protected. You do not want to end up planting and harvesting the crop only discover you could have purchased it cheaper than it cost to plant it.
My recommendation is to purchase put options for your feed production for both corn and soybeans. This can either be done by purchasing a straight put option (which is pricey) or buy a put option spread consisting of purchasing an at-the-money put option and selling a lower strike price put option against it to cheapen the cost. I have no new recommendations for milk.
Upcoming reports to watch for are the May Livestock Slaughter report on June 26; The June Agricultural Price report on June 29; the California Class 4a/4b prices; the federal order class prices on July 2; the May Dairy Products report on July 2; the World Agricultural Supply and Demand report on July 10; fluid milk sales on July 10; and the California Class I price on July 10.
--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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