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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.

Milk Prices Are Supported – For Now

Aug 08, 2011

Enjoy high milk prices, especially with high feed prices. But there is a delicate balance being maintained. Any slight change in this balance can result in significant movement either way.

 
Milk prices continue to remain strong. USDA announced the July Federal Order Class prices last week, with Class III announced at a new record high of $21.39. This beat the previous record in July 2007 by a penny, and is welcomed news given the high feed prices being experienced. The question now is how long it will last.
 
August Class III futures currently indicate a higher price is yet to come and most likely it will. The majority of the August contract has already been priced, and futures are beginning to flat-line about 10 cents above July’s record. Subsequent months hold a discount to the cash with traders thinking a retracement may take place at any time.
 
Will dairy remain immune to the effects of the plummeting Dow and other financial markets? Initially, investors are pulling money out of some of these markets due to the uncertainty. The raising of the national debt ceiling did little if anything to calm fears in the U.S. or international markets. Now that Standard & Poor’s downgraded the U.S. debt rating to AA+ from the previous AAA rating, more concern is rippling through the markets. Eventually, this will impact consumers.
 
Last week, the monthly report on consumer spending indicated a drop of 0.2% in June, the first decline in 20 months. Income increased 0.1%, the lowest increase since September. This could spell trouble for dairy consumption and eventually prices. The argument is always made that people have to eat. That certainly is true, but diets and food products purchased can change when disposable income becomes tight. All we need to do is look back to the last recession two years ago. Class III milk prices declined into the $9 range. I am not suggesting this will happen again, and I do not really believe it will go that low. I am suggesting that milk prices certainly could decline from current levels.
 
Time of year is certainly in the favor of keeping milk prices higher for a longer period of time. Hot, humid weather over the past month has impacted milk output, with milk plants indicating a decrease of milk receipts of 10% on an average. Cheese yield has declined as a result of lower components. This comes at a time when increased volumes of milk will be moving to bottling to fill school pipelines. Higher Class I demand at a time of year when buyer interest of cheese and butter increases generally supports prices. Now throw in a significant decrease in milk production and prices could remain supported despite the outside pressure from other markets. Keep in mind there generally is a lag time in the dairy industry with pricing, so be prepared. Do not feel complacent. Utilized option strategies to establish floor prices and protect income.
 
World dairy prices are slowly declining, according to the Global Dairy Trade (Fonterra) auctions. U.S. prices will not be able to defy this weakness without limiting export ability. Major exporters of dairy products are expecting higher milk production for 2011. Argentina forecasts production to increase 4%. Australia estimates an increase of 3%, New Zealand up 5%, the European Union up 1%, and the U.S. increasing 1%.  
 
We know there are plenty of heifers waiting in the wings. A somewhat favorable milk/feed ratio could increase production significantly in the months ahead. Many dairy farmers I have talked with are planning to increase cow numbers in the months ahead.
 
For now, let’s enjoy high milk prices, especially with high feed prices, but there is a delicate balance being maintained. Any slight change in this balance can result in significant movement either way.
 
Grain prices need to be monitored closely. Financial markets are putting significant pressure on grain futures despite the concerns over production and stocks. This will give an opportunity to protect feed prices. I recommend the purchase of call options and call option spreads in corn and soybean meal before the World Agricultural Supply and Demand report on Thursday. The trade is anticipating a decrease of acres, potentially resulting in tighter stocks next year.
 
Upcoming reports:
 
  • California Class I price on August 10
  • World Agricultural Supply and Demand report on August 1
  • Fluid milk sales on August 12
  • Fonterra auction
  • July Milk Production report on August 18
  • September advanced Class I price on August 19
  • July Cold Storage report on August 22
 
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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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