Sep 3, 2014
Home| Tools| Events| Blogs| Discussions Sign UpLogin


Know Your Market

RSS By: Dairy Today: Know Your Market, Dairy Today

Dairy trading experts offer strategies and practical perspectives to optimize market performance.

March Madness Sends Ripples through the Milk Market

Mar 26, 2012

Extreme price swings this month kept us all on the edge of our seats. Producers should be filling out their “brackets” – weighing the impact of various strategies on their average feed and milk prices for 2012.

WDE D10106a DoorninkBy Liz Doornink, Stewart-Peterson

Let’s take a look at the play-by-play for the March madness of milk prices, then take a “time out” to discuss a potential game plan for managing the volatility that is still ahead:

Thursday, March 1
The first day of March was truly the calm before the storm as cash cheese was unchanged and milk prices tacked on modest gains. The 2012 Class III average price was sitting comfortably at $16.10 with strong premiums built into the nearby months as the market anticipated optimism in the short-term.
 Class III March 1 2012
 
Friday, March 2
Milk prices were pressured as aggressive selling emerged in the cash cheese market. Blocks were down ¾ of a cent on a total of 13 trades, and barrels were down 2 cents on a total of eight trades. A total of 21 carloads traded hands, solidifying the strong selling interest in the marketplace. Milk prices quickly erased their premiums, with April milk finishing down 61 cents and May milk finishing down 53 cents. The 2012 Class III average softened, moving below the $16.00 price level, and closed at $15.93. Class III March 2 2012
 
Monday, March 5
Losses were extended sharply to start the week as cash cheese traded lower and reached new lows for the year. Blocks were down 2 cents to $1.4600, and barrels were down 2¼ cents to $1.4575. New lows in the cash cheese market, dating back to January 2011, spooked the milk market, with April and May milk trading down the daily limit of 75 cents. The price action suggested the milk market was throwing in the towel and saying, “Look out below.” In two days, April milk lost $1.36, and the 2012 Class III average trimmed 48 cents to $15.62.  Class III March 5 2012
 
 
Tuesday, March 6 to Thursday, March 22
After hitting rock bottom, milk prices made a 180-degree turnaround and trekked higher without looking back. In 12 out of these 13 trading days, April milk has been either unchanged or higher, accounting for $2.07 during the stretch. Cash cheese also posted a strong reversal with the block/barrel average up 17 ¼ cents, from $1.45875 to $1.6300. The 2012 Class III average sat at $16.33, which is 70 cents off the low on March 6 and 23 cents higher for the month of March.
Class III March 22 2012
 
Friday, March 23
The March madness continues. Cash cheese was hit hard as the sellers came off the sidelines and stepped back into the driver seat. The blocks were down 14 cents to $1.4950 and the barrels were down 16 ½ cents to $1.4600, erasing three weeks of gains in only a few minutes. The sharp losses spilled over into the dry whey market and ultimately the Class III milk prices. The April contract traded down the daily limit a handful of times but buying interest kept the second month contract afloat, avoiding a limit down close. May-Jul y were initially pressured lower but managed to recover the bulk of their losses into the close. Click here for the video "week in review."
Class III March 23 2012
 
What’s next?
As the clock runs down on the first quarter, the supply-side of the equation continues to be the “elephant in the room.” February milk production came in at 16.280 billion pounds, or 15.699 billion pounds when Leap Day milk production is excluded from that total. The year-over-year increase in milk production comes to 4.3% with this adjustment. This is the strongest year-over-year increase in February milk production since 2006, when it grew by 5.3%.
 
The recent rally in corn complicates and muddies the long-term picture. Since 2006, we have seen a very strong directional relationship between corn prices and milk prices. Sometimes milk prices can lag behind, but, if corn is trending higher, milk eventually follows and catches up. So, if the rally in corn is real and not a false breakout, and corn works its way up, there is only so long that milk prices will be able to maintain a downward trajectory. 
Total US Milk Production
 
What’s your game plan?
If you’ve been following this column, you know that we encourage producers to have an end-game goal of building the best possible weighted average price over time for milk and also for feed. Doing so requires consistency and constant analysis, so you are ready to act when prices break one way or another.
 
 
Source: Stewart-Peterson Inc.
 
How can you be ready to act? Take a time out from the action and prepare strategies, then analyze the impact of those strategies in multiple price scenarios. This advance work does two things:
• It allows you to choose the strategy that has the most impact on your overall price.
• It allows you to know the impact if the market price goes up, or if the market price goes down.
That way, there are no surprises.
 
For milk, a simplified analysis for May milk might look like this:

Simplified Market Scenario Planning Table for May Milk
 Simplified MSP Table for May Milk
Source: Stewart-Peterson Inc.
Fees and commissions are not calculated for this simplified example.
 
Simplified Market Scenario Planning Table for Corn
 Simplified Market Scenario Planning Table for Corn
Source: Stewart-Peterson Inc.
Fees and commissions are not calculated for this simplified example.
 
Remember, knowing your weighted average price for feed and milk is important. This is not the figure you see on your milk check, which represents only a portion of your yearly average price. Calculate your weighted average price for the year, then stay focused on incrementally bringing that weighted average price for milk up (or down for feed purchases). Then you will have a true measure of your marketing effectiveness.
 

Liz Doornink is in Dairy Business Development for Stewart-Peterson, Inc. Liz can be reached by calling 800.334.9779 or at ldoornink@stewart-peterson.com.

Market Scenario Planning is a service of Stewart-Peterson Inc.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.
Log In or Sign Up to comment

COMMENTS

No comments have been posted, be the first one to comment.
 
 
 
The Home Page of Agriculture
© 2014 Farm Journal, Inc. All Rights Reserved|Web site design and development by AmericanEagle.com|Site Map|Privacy Policy|Terms & Conditions