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AgDairy Market Update

RSS By: Robin Schmahl, Dairy Today

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.

Declining Feed Prices May Offer Opportunity

Nov 15, 2010

Is it the beginning of the end for higher grain prices for the near-term? Grain prices could be steady to weaker through year’s end, giving some opportunity to lock in feed prices at a better level.

 
Cheese prices have fallen steadily over the past month and are now back to the level they were in late June. Many did not think this would be possible, given the significant increase in grain prices over the same period of time. The correlation of high feed prices to high milk prices is not holding true this time, at least not yet. In a previous article, I spelled out that this may not hold true every time. Grain markets and dairy markets follow different fundamentals and can trend differently at times.
 
One thing we do know is that high grain prices and low milk prices will increase culling, since cows that are not paying for themselves will be sent to slaughter. This, in itself, will not guarantee tighter milk supplies and higher prices. It will reduce cow numbers, which can decrease milk production. It can also cause increased milk production, since reducing overcrowding may lead to increased cow comfort and higher milk production per cow. It can also allow for heifers to be added to the herd with greater milk production potential.
 
The latest World Agricultural Supply and Demand report released by the USDA looked as if profitability was going to get worse. USDA reduced the corn crop by 124 million bushels, which reduced production to 12.54 billion bushels. With increased ethanol demand, this puts potential ending stocks at 827 million bushels, the tightest they have been since the 1995-96 crop.
 
Soybean production was cut 33 million bushels, with ending stocks reduced 80 million bushels, to 185 million bushels. The reduction of soybean ending stocks was the bullish aspect of the report, but these stocks would still be 34 million bushels higher than last year.
 
Interestingly enough, corn moved higher as post-report trading began, but it soon lost buyer interest with price declining each day since the report. In fact, Friday ended with price falling the 30-cent daily limit. Soybean price held better with a significant increase the day of the report, but succumbed to selling pressure on Friday as well, suffering limit losses of 70 cents.
 
This could be the beginning of the end for higher grain prices for the near-term. Some purchasing of grain may have been front-loaded with sales potentially declining for a period of time. China raising its interest rates and South Korea passing on some U.S. corn did not sit well with fund traders.
 
It is difficult to know how much prices will retrace or when to bottom-pick prices. Grain prices could be steady to weaker through the end of the year. This will give some opportunity to lock in feed prices at a better level.
 
If funds become more aggressive at liquidating their positions, there could be some significant downside. When it seems prices may be bottoming, it will be the time to step in to purchase call options or call option spreads to protect feed prices. I recommend options rather than forward contracting. This allows you to take a lower price if one were to develop while at the same time protect against higher prices.
 
All in all, 2011 will be another challenging year. Even though milk prices look to be lower for the first half of the year as indicated by futures contracts, milk production is still expected to remain strong. High feed prices will eventually impact milk production, possibly improving milk prices by the second half of the year. Exports have improved dramatically this year, but help also needs to come from improved domestic demand and this is still in question.
 
The U.S. economy is not as great as it was expected to be by this time. The unemployment rate needs to decline and the public needs to feel more secure about their jobs. Greater disposable income will improve consumption. Cheese inventory needs to decline for significantly higher prices to materialize.
 
Upcoming reports:
 
-          October Milk Production report on November 17
-          December Class I Advanced price
-          October Cold Storage report on November 22
-          Consumer Confidence on November 23
-          Commercial disappearance of dairy products on November 23
-          Dairy Markets closed on November 26
-          October Livestock Slaughter report on November 26
 
 
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.
 
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