The Future Looks Brighter
Oct 26, 2009
By Robin Schmahl
Milk prices have been improving the past two months, but still are generally below the cost of production. The October federal order price will be announced on Friday and will be near $12.70. Looking at the futures contracts, one can get more excited over milk prices next year. Class III futures prices for 2010 currently show March through December contracts averaging near $15.30/cwt.
Throughout the year the cry has been for lower production. Cow numbers were too high and production too strong for demand. This problem would be solved if the economy rebounded quickly resulting in increased demand. There are signs the economy is getting better, but it will take awhile. In the mean time, measures have been taken to improve prices by killing cows and temporarily raising support prices. There has also been much discussion and recommendations made to control production as a means to improve and stabilize milk prices. None of which have yet come to fruition.
The combination of CWT’s herd reduction program and continued low milk prices are getting the job done. The September milk production report indicated cow numbers were 197,000 head lower than the previous year. This has reduced milk production. In fact, so much that some processors are now indicating production has fallen too much and they are having some difficulty getting enough for needs. Milk handlers in California do not have any previously imposed quotas in place and have actually encouraged producers to increase production. Class I demand is strong despite the interruptions from the flu, which is causing many schools to close down for a few days.
Milk production is on a downward trend with September milk production 0.7 percent lower than the previous year according to the USDA. U.S. milk production has now declined four consecutive months. This lower trend has been anticipated and is welcomed by farmers. Milk prices are improving as a result and Class III futures indicate higher prices to come. World prices continue to improve, aiding the milk price recovery.
Caution must be exercised however, as this time of year generally shows a demand increase followed by a few months of slower demand. We cannot feel comfortable that milk prices will continue to increase as suggested by 2010 futures. September cheese inventory did see some reduction in the latest cold storage report, but not near the average decrease seen in other years. If cheese stocks do not decrease as much as they should and inventory begins the New Year somewhat burdensome, a significant price recovery could take longer to materialize. Buyers may not need to step up and replenish aging programs quite as aggressively as most other years.
Lower milk production will eventually tighten the availability of dairy commodities and thereby increase prices. This is what we have been waiting for all year.
Upcoming reports to watch for are the October Federal Order class prices on October 30, the Agriculture Prices report on October 30, the California 4a/4b price on November 2, the September Dairy products report on November 4, and the World Agricultural Supply and Demand report on November 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.
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