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.
Potential Milk Price Rally in Doubt
Dec 13, 2010
The milk price trend doesn't look bullish. The recent cheese price rally has come and gone. And, although some think high grain prices will translate into high milk prices, I don't think that dairy upswing is likely to happen.
Cheese buyers have become less aggressive as most cheese for the holidays has been shipped. Higher mailbox milk prices were a welcomed sight over the past few months. Increasing cheese prices gave the impression that early 2011 months may not as bad as Class III futures were anticipating.
However, the recent rally in cheese prices has come and gone, with futures trending lower. The January Class III contract is perilously close to breaking below $13.00. If cheese prices decline further, January could post the lowest Class III milk price since April.
There has been much speculation over potential milk prices for the upcoming year due to strong grain prices. The idea of high grain prices translating into high milk prices is prevalent. I have dealt with this subject in a previous column showing that this is not always the case.
If there is a rally in milk prices due to an extended period of high feed prices, it would be delayed since it usually takes a few months before the effect is felt. We are currently experiencing one of those times when grain prices are high. Corn prices have been above $4.00/bu. since the end of July with price above $5.00/bu. since Oct. 8 in the December futures contract.
The block cheese price was $1.60 1/4 at the end of July and moved up to $1.77 by Oct. 6 before falling to $1.40 on Nov. 11. The price last Friday fell to $1.39, the lowest it has been since June 15. This certainly is not showing much promise for higher milk prices due to higher grain prices. My expectation is feed prices will eventually have an impact, but the timing of this is difficult to predict.
Many analysts speculate that corn and soybean prices may move significantly higher as the marketing year progresses due to strong demand for food, feed and fuel. Export sales have been doing well, especially for soybeans. Sales for this marketing year are already at 78.2% of USDA’s estimate of exports. This is 20.7% ahead of the 5-year average.
Corn sales have not been as aggressive as soybeans, but have been steady with 47.5 % of USDA’s estimate already sold. There was concern over the ending of ethanol subsidies at the end of this month, but Congress has extended the 45? per gallon subsidy for another year. (How is that for sweeping in under the carpet for awhile instead of making a decision?) The current import tariff of 54? per gallon will also remain in place. On top of this, they will resurrect and extend the $1.00/gln. subsidy for biodiesel, which was dropped last year.
USDA made little change to its expectation for 2011 milk prices on the World Agricultural Supply and Demand report released last Friday. The Class III milk price for next year is now expected to range from $14.45-$15.25/cwt., only a slight change from the previous month. Class III price is expected to average $14.40/cwt. this year. The all-milk price is expected to range from $15.90-$16.70/cwt., a slight decrease from the November report, with the average price for this year estimated at $16.30/cwt. Overall production next year was only reduced 100 million pounds to 195.5 billion pounds. This would be 2.7 billion pounds more than 2010.
Hedging opportunities are limited due to the low Class III prices in the first half of the year. If protection needs to be done to protect against prices below current level, I still recommend fence positions. Purchase a put and sell a call at the highest strike price possible while keeping cost reasonable.
It is unlikely milk price will rally much during the first half of the year. Those who initiated fence positions earlier per my recommendations have a significantly better price protected. Be more conservative for the second half of the year. Fence positions are still preferred, but keep hedging volume limited.
- Fonterra Auction on Dec. 15
- January Class I price on Dec. 17
- November Milk Production report on Dec. 17
- November Cold Storage report on Dec. 22
- No trading on Dec. 24