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.
Surprising Weakness in Cheese Dims Year-end Outlook
Aug 22, 2011
Declining fluid milk sales, rising milk production and the unstable economic markets are also pressuring dairy prices.
The inevitable happened last week but came sooner than anticipated. Cheese prices fell below $2.00 -– a place where they had not been since early June. It was a surprise that it happened this early in the year and did not wait until after holiday demand was completed.
Milk production suffered in July due to the hot, humid weather in many areas, decreasing manufacturing milk receipts by as much as 10%. Recently, bottling demand has increased and will continue to increase over the next weeks as schools will be back in session and the pipeline needs to be filled. Holiday demand is also right around the corner. It was anticipated this would keep cheese prices, and thus milk prices, strong for some time.
There is anticipation that cheese prices may remain below $2.00 for only a brief period of time. Recent weakness has cheese buyers standing back, waiting to see how low prices will go. Loads are being purchased as prices decline, but sellers remain more aggressive. Why don’t sellers hold product with the idea that school milk and holiday demand will continue to support prices?
The daily spot market at the CME Group is typically a market where buyers come if they need cheese or butter and cannot get it from their normal suppliers or in the general marketplace. Sellers will offer it because they have excess and need to offer it to those who are willing to purchase it. There could be other reasons that would have cheese being purchased and sold on the spot market, but it generally is for the reason I have described.
Right now is usually the time of year when buyers are more aggressive and supply is tighter. So far, this has been true, and it is possible the price peak has been realized early. July posted a record Class III price of $21.39, with August to break the record with an anticipated price near $21.50. Feed prices are high, and school and holiday demand is here, so why the weakness?
One reason for weakness is that fluid milk sales continue to decline. USDA’s latest report of fluid milk sales indicates June milk sales of all fluid products declined 1.6%. Sales for the first half of the year were also down 1.6%. This is a concern, as fluid milk consumption continues to decline.
Another reason is that milk production continues to increase. USDA’s latest Milk Production report, for July, indicated an increase of 0.7 percent for all 50 states. This increase came during a month when hot weather had a significant impact on production. Even though production per cow was down 3 lb. per head from the previous year, cow numbers increased 80,000 head. Cooler weather will bring back milk production to some extent, but it will take replacements and the next lactation to get production really rolling again in many areas of the country.
Western states were the exception this summer. Despite hot weather primarily in Texas, milk output rose steadily. The July Milk Production report showed Arizona up 4.8%, California up 4.4%, Idaho up 4.8%, Washington up 6.6%, and Texas up 8.3%. Texas has been the real surprise, as weather has been hot and dry for much of the year but production has increased consistently. Despite the adverse weather and high feed costs, this state increased milk production 7.7% in January, 8.8% in February, 7.0% in March, 7.2%in April, 8.8% in May, and 10.3% in June.
The instability of financial and economic markets worldwide is definitely having an impact as well. This may cause consumers to change lifestyles and eating habits, resulting in slowing demand for dairy products. August may be the high for the year, with lower milk prices in the offing for the rest of the year. This does not mean prices will be falling dramatically, but lower prices could be with us through the end of the year.
Class III futures contracts for 2012 have been trading sideways to higher over the past few weeks, pushing quite a few contracts above $17.00. This triggers the price for establishing either futures sales or fence positions for price protection. I recommend purchasing $16.75 puts and selling $18.75 calls in all months as a fence position. The cost will be 50 cents. The best-case scenario is that you will be hedged at $18.75 minus the cost of 50 cents if the price increases. The worst-case scenario is a hedge at $16.75 minus the cost if milk prices fall. A double-dip economy is a possibility and could be devastating to milk prices.
- Commercial Disappearance report on Aug. 23
- July Livestock Slaughter report on Aug. 26
- Agricultural Prices report on Aug. 31
- Dairy Products report on Sept. 1
- August Federal Orders class prices on Sept. 2
- Fonterra auction on Sept. 6
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He can be reached at 877-256-3253 or through the firm's 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 trading may not be suitable for everyone. Those acting on this information are responsible for their own actions.