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Milk Market Fundamentals and Technicals: Your Map and Compass for the Marketing Frontier

Apr 23, 2012

Using them together is a crucial start on the journey toward disciplined and consistent marketing.

Rocky GinggBy Rocky Gingg, Stewart-Peterson
Milk production and moving averages, cold storage and crossovers, slaughter and support levels. There are numerous fundamentals and technicals that provide market insight and shed light on developing trends. At the end of the day, which should drive key marketing decisions?
For producers, analyzing charts can be intimidating and time consuming. And yet, with unrelenting volatility, many producers are exploring what marketing knowledge, strategy and skills might mean for their dairy operations.
Here’s a quick primer on fundamentals and technicals, because using them together is a crucial start on the journey toward disciplined and consistent marketing.
How fundamentals relate to technicals
Fundamentals are best described as a map which gives us the lay of the land or the landscape of the market. The map gives us our bearings and provides the backdrop of where peaks or valleys may arise. Technicals can be viewed as the fine-tuned compass which we use to navigate and make key strategy decisions. Both the map and the compass are individually important, and to make decisions efficiently and effectively, they are needed together. Without a compass, we are less confident and even a little complacent on making decisions. Without a map, we can be too caught up with particulars and end up not seeing the forest through the trees.

Analyzing recent events
For illustration purposes, let’s look back at the volatile month of March and see how a combination of fundamental and technical analysis would or could have played out (while, of course, realizing that hindsight is 20/20).

We start by gaining our bearings, looking at some key fundamental trends. As 2011 came to a close and the calendar flipped to 2012, the three-year cycle was fresh in everyone’s mind. These thoughts and concerns were quietly confirmed with December milk production posting a year-over-year gain of 2.4%, which was the 23rd month in a row with year-over-year gains. The herd size came in at 9.22 million head, which was up 82,000 head from the previous year. The supply side of the equation is telling us to proceed with caution.

Continuing our fundamental analysis, now let’s take a look at the demand side of the equation. December cold storage revealed total natural cheese stocks were down 6% from the previous year, which was the fourth consecutive month posting a year-over-year decline. It was also the first December to post a year-over-year decline since 2007. Analyzing two key fundamentals provided a very mixed picture but did show what could be on the horizon.

Now let’s take a look at our compass, the technical side. Once again, for illustration, let’s look at a few March 2012 charts and imagine how technical analysis could have helped a dairy producer make key marketing decisions.

Gingg chart A 

Chart A is a daily bar chart with each bar representing a day’s worth of trading. The green and red lines are key moving averages that measure momentum and direction. The green line is a shorter-term average and the red line is a longer-term average. When the shorter-term average (green line) crosses above the longer-term average (red line), momentum is bullish. When the shorter-term average (green line) crosses below the longer-term average (red line), momentum is bearish. In Chart A, the indicators are pinching at a key psychological price level of $17.00. Our compass is showing we need to respect the indicators and sell a portion of our milk, say, 25%.
Gingg chart b 

Following this first sale, the indicators then snapped back and assumed the upward climb toward $18.00, as depicted in Chart B. With 75% of your milk open to the higher trending market, you’re feeling pretty comfortable. Then the contract reaches new highs above $18.00 and posts what we call a strong bearish reversal, meaning the contract traded above the previous day’s high but closed below the previous day’s lows. You then might decide to sell the next portion of your production, perhaps another 25%, at $17.00.

Gingg chart c

Now with 50% sold, you might be patient on making further sales. When the key moving averages cross bearish, however, as on Chart C, technical analysis suggests that there could be further downside ahead. You decide to respect the crossover and sell another 25% for a total of 75%.
Gingg chart d
So, as you can see, with our map and compass as our guide, we were able to make key strategy decisions when we saw forks in the road. The result in this illustration was a net weighted average milk price for March of $16.72 compared to the Class III Settlement of $15.72, as summarized in Chart D.

Keep in mind that this was a simplified example. Many other decisions are part of a comprehensive marketing approach, such as how much of your production to sell, and what tool to use at what time at what cost. That’s a lesson for another time.

For many producers who are already efficient producers and managers, commodity marketing is the final management frontier to be explored. Educate yourself on fundamentals and technicals, and you will give yourself a starting point for your journey into marketing.

If you’re looking for a review of the current fundamental picture for the dairy markets, click here to view the Dairy Market Week in Review on AgWeb.com.  
Rocky Gingg is a Market360® Advisor for Stewart-Peterson Inc. He can be reached by calling 800.334.9779 or at rgingg@stewart-peterson.com.

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.

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