Know Your Market
Five Thoughts for the Future
Sep 25, 2011
Key agricultural crops, by-products and economic indicators that are influencing your business.
By Marv Carlson, Dairy Gross Margin, LLC
In the 2011-12 crop year, the world is seeing a substantial increase in feed wheat supplies. Russia had a big rebound in wheat production after last year’s disaster. Currently, Russia is selling wheat to the world at the lowest prices. This wheat is competing with corn in feed rations and has the effect of capping corn prices. In the U.S., some wheat feeding is occurring in the Southeast (think chickens). Even Canadian feed wheat is moving into that area. China has also purchased feed wheat (think hogs and chickens) from Australia. If Australia has a big crop, more wheat will move toward China and other Southeast Asia destinations. Presently, cash hard red wheat is more expensive than corn. This limits the amount of wheat being fed in the southern feedlots.
The ethanol industry will lose the $.45 per gallon blenders credit in December. The loss of this credit will make it less lucrative to blend ethanol and gasoline. However, the blenders will still be required to blend 13.2 billion gallons of ethanol in 2012 (up from 12.6 billion gallons in 2011). This is required by the Renewable Fuels Standard (RFS). As a historical reminder, Governor Rick Perry asked for a waiver of this standard in 2008 but was denied. The RFS can be changed by the EPA director, but only after much discussion and a 90-day comment period. The perception is the loss of the blenders credit could reduce the amount of ethanol produced, thereby lowering corn prices. On the other hand, ethanol exports have been robust, especially to Brazil, which is dealing with a small sugarcane crop, the principal feedstock for their ethanol industry.
The Global Economy
The world economy continues to be an issue for all commodities. Europe is still a mess with its own financial crisis. Greece, Italy, Portugal and Spain are main culprits. Many European banks have loaned money to these countries. Guess what? The European banks are under great scrutiny. For over a year, the value of the dollar has been going lower, supporting dairy exports. In the last two weeks, the dollar has moved higher because of the European problems. This strength in the dollar could be an issue especially if it would move higher at a fast pace, thus reducing exports.
What a deal. China (along with Fonterra) has increased demand in China for dairy products. This has significantly helped to soak up excess world supplies of dairy products. China’s newest food inflation crisis is pork. China is trying to increase production of pork after a major disease outbreak. Chinese pork prices are at record highs. Corn prices are $9.25/bu. and soybeans are $18.64/bu. China has started to import wheat to rebuild stocks. Will China import more corn to encourage pork production?
Generating net income in the dairy business has been challenging. High milk prices and higher feed costs have taken some of the fun out of being a dairyman. Managing the risk of changing margins can be done with a variety of tools. There are simple choices like cash purchases of feed and forward contracts with your dairy co-op. Or you can use futures to hedge feed inputs and milk. These two choices give you absolute margins. If margins get better (milk prices go up or feed prices go down), you would not benefit.
Options and/or LGM-Dairy can help manage your income over feed and leave the top side open. For this reason, options or LGM-Dairy should be a part of your risk management program. If margins get better, you will benefit and build up a cash cushion for the future.
Marv Carlson is with Dairy Gross Margin LLC in Sioux Rapids, Iowa. Contact him at firstname.lastname@example.org or (712) 240-8395. Visit the firm’s website for more information: www.dairygrossmargin.com.
(Contributing to this month’s article is Ron Mortensen, who will be a panelist at Dairy Today’s Elite Producer Business Conference Nov. 7-9 in Las Vegas. Learn more about the conference at: http://www.agweb.com/livestock/dairy/elite_producer_business_conference.aspx)