AgDairy Market Update

As hay stocks decline, some Central region dairy farmers are sacrificing milk production in lieu of stretching their feed supply.

It certainly has been a difficult year. Farm profitability in most cases has been very slim, with the national average milk-to-feed ratio ranging from a low of 1.29 in July to high of 1.73 in both October and November. Despite this range, profitability did not improve very much.

On top of this, many farms were short on feed due to the drought requiring further cash outlay over and above what they would normally have had to pay for feed. The cold, wet spring this year will delay harvest of winter forage and first cutting hay in the Midwest and Northeast, further taxing feed supply.

One result of this delay has been the reformulating of rations to find substitutes for feed supply in order to stretch inventory. Reports from milk handlers in the Central region are that milk receipts are not steadily increasing as expected. Farmers are sacrificing milk production in lieu of stretching feed supply. Another difficulty many Upper Midwest farmers are dealing with is severe winter kill of the hay crop. Many farms in Wisconsin have 50% or more loss of alfalfa fields, requiring alternative planting decisions to be made. This certainly is not welcomed and adding insult to injury.

Hay supplies have been dwindling as more hay land is being sacrificed to row crops. Drought conditions have reduced production, leaving hay supply significantly reduced.

USDA reported U.S. hay stocks as of May 1 at 14.156 million tons, down 34% from a year ago. By comparison, hay stocks on May 1, 1989, after the severe drought the previous summer, were 17.507 million tons. In fact, hay stocks as of May 1 are the lowest since 1950 when USDA began recording them.

When looking at the state breakdown of hay stocks, there are some interesting changes over the past year. Eight states bolstered their hay stocks from last year. These states were California, Colorado, Georgia, Kentucky, New Jersey, Oklahoma, South Carolina and Texas. The state of Texas showed the largest increase, with hay stocks growing 700,000 tons to a total of 1.650 million tons, which are the largest hay stocks of any state. However, supply declines were severe in many states, with some falling as much as 50% or more. South Dakota showed the largest decline, with stocks falling from 2.4 million tons on May 1, 2012, to current stocks of 850,000 tons.

While dealing with a significant reduction in hay inventory and increasing prices this past year, hay exports continue to grow. Current hay exports account for 4% of the nation’s annual production. Japan, Taiwan, and South Korea have been our traditional buyers, with China, Vietnam, United Arab Emirates and Saudi Arabia recently importing more U.S. supply.

Hay prices have risen significantly in recent years, with alfalfa price reaching $200 per ton for the first time in October 2011. Since then, price has been at or above that level 13 times with the past nine consecutive months above $200. A record high price was set in March at $219 per ton.

Hay acreage and production has suffered due to strong grain prices and drought, and this likely will not change anytime soon. The bright spot could be that in time production of hay could increase the interest of farmers to again plant more acres for income, erosion control and demand.

Upcoming reports:

- Global Dairy Trade auction on May 15
- April Milk Production report on May 20
- April Cold Storage report on May 22
- Advanced Federal Order Class I price on May 22

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their 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 my not be suitable for everyone. Those acting on this information are responsible for their own actions. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication.

Instant information and world influences often drive dairy markets, but wise traders also follow proven pricing patterns.

It is interesting to note how all of us generally personify the market. We give it a mind and a life. One of the reasons we tend to do this is because it can many times act like an uncontrolled being that moves as it wills. So we have coined the terms, "The market knows where it wants to go" or "Oats knows where corn will go" and a few others.

These phrases are coined because of patterns that have been established over years of trading. This is much like the "Farmers Almanac" or a book I once read entitled, "Weather Wisdom," which recorded the atmospheric events old-timers observed for years and the resulting weather patterns experienced. I would have to say that many of these observations seem to be more accurate than the current weather technology available to us today.

When it comes to marketing, much of the same can be said. Certain market patterns can still be followed and, in the end result, be more accurate than the day-to-day volatility. However, technology and the instant access to information around the world as well as twitter opinions can have a significant affect on day-to-day and well as minute-to-minute trading activity.

This was seen when an Associated Press Twitter account was hacked last week, and false information was transmitted resulting in the stock market "flash crash," only to regain value is short order after the tweet was discovered to be bogus. This is a fearful situation and one that can have significant impact on the markets. Panic produces volatility, but panic is short-lived and should not be a consideration when using the markets for price protection.

Dairy markets have been moving through a situation similar to this over the past few months. Weather in New Zealand and Australia has been the catalyst for Global Dairy Trade auction prices showing dramatic increases over the fear of world supplies tightening as the year progressed.

Figures released by Statistics New Zealand indicated China as the largest importer of dairy products from the country for the first quarter of this year. Exports to China increased 32% from a year earlier. Since 2008, China’s imports from New Zealand have more than tripled. This is getting quite a bit of attention from the industry, especially due to the weather situation New Zealand has been experiencing. If supply from the country is reduced substantially, China will likely be looking for supply from anywhere else it can find it. Interestingly enough, the U.S. was and is the third largest importer from New Zealand, according to the report.

Not only has the market changed as far as instant information and world market influence, but it has also changed from the standpoint of comfortability. Grain markets seem to have become more comfortable with tighter inventory and lower stocks-to-use ratios while, on the other hand, dairy markets seem to be more comfortable with larger inventory.

On the latest "Cold Storage" report released last week by the USDA, American cheese stocks increased 19.2 million pounds from February to 680.2 million pounds, up 4% from last year and the highest stocks since 1986. Swiss cheese stocks increased 4.0 million pounds to 30.5 million pounds, up 6%. Other cheese stocks increased 13.8 million pounds from the previous month to 391.4 million pounds, up 7% over last year. This put total cheese inventory at 1.1 million pounds, 5% from a year ago and the highest since 1986. Butter stocks increased 19.5 million pounds for the month to 254.8 million pounds, 22% higher than last year and the highest stocks for the month of March since 1993. Even with these high inventory levels, the industry feels the market is comfortable and not burdensome.

Upcoming reports:

- April Agricultural Prices report on April 30
- Global Dairy Trade auction on May 1
- April Federal Order class price on May 1
- California Class 4a/4b prices on May 1
- Dairy products report on May 2
- World Agricultural Supply and Demand report on May 10

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through his website.

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. Those acting on this information are responsible for their own actions. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading that may not be suitable for recipients of this publication.

Buyers have been stepping up aggressively to get their hands on cheese, butter and nonfat dry milk.

Market-moving information has been in abundance recently. Both domestic and international news has been plentiful as far as dairy is concerned. This information has turned market participants more bullish. Cash prices have been moving somewhat contra-seasonal and have increased more than had been anticipated early in the year.

The potential impact on dairy product supply stemming from the drought in New Zealand has had the greatest underlying support. A significant decline of milk production from dried up pastures prompted many to dry off cows early. Others are using supplemental feed, which is increasing costs. March production is estimated to be nearly 30% below last year. There is time before the majority of the cows will freshen, and for rain to replenish soil moisture and promote pasture growth. However, it does not look to promising at present. There are some forecast models showing rain events in the next few weeks, but it is still too early to tell.

Cheese and butter buyers have been stepping up aggressively to get their hands on available supply. Prices have been increasing as sellers have been reluctant to offer product. Inventory is being held with confidence, waiting for higher prices as well as retaining supply for later in the year.

Nonfat dry milk (NDM) has been the leader of the cash complex. Buyers have been falling over themselves attempting to obtain product despite current fundamentals. Prices were anticipated to increase, but many are surprised at the speed in which it has happened. Grade A nonfat dry milk price jumped over 28 cents in the past month. This volatility is not unusual in this market, with early 2011 recording a very similar rise in price over a three-week period.

Production schedules are increasing now that spring flush is underway. Supply seems sufficient with resellers offering loads but at the high end of the price range. NDM production in February totaled 62,369 metric tons, down 20% from last year. Cumulative production is down 14.0% for the first two months of the year versus last year. Lower production in the face of supply concern from Oceania has lit a fire under the market.

USDA did not make a large change in milk production or dairy prices on the latest World Agricultural Supply and Demand Estimates report. Projected milk production was reduced 100 million pounds from March, totaling 201.8 billion lbs. If realized, milk production would be 1.5 billion pounds more than 2012.

Milk and product prices were increased with the current estimate for the All-Milk price projected to average $19.70, up $1.19 from 2012. This certainly is good news. However, the concern over higher feed prices is alive and well. USDA did not increase grain ending stocks as much as most had anticipated. This puts us in a serious situation if weather is not ideal this growing season. The nation is already experiencing less than ideal weather. Soil is too cold and too dry in some areas. Other areas of the country continue to experience snow and rain with below normal temperatures keeping farmer out of the fields

USDA will reinstate the monthly milk production reports after there was significant outcry from industry personnel. The report will be a bit different as the surveys of production will be using government agencies, cooperatives and other organizations rather than the surveys it had done. This may not be as accurate but certainly will be welcomed by the industry.

My hedging recommendations are similar to my last article. Hedge feed prices now before prices regain what was lost since the Quarterly Stocks report. Corn has already regained 20 cents with soybeans up 30 cents from the lows. Use call options and call option spreads that will protect against higher prices while at the same time allow for lower prices if ideal weather is experienced and lower prices unfold.

Upcoming reports:

- Global Dairy Trade auction on April 16
- March Milk Production report on April 19
- March Cold Storage report on April 22
- Livestock Slaughter report on April 25

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication. Those acting on this information are responsible for their own actions.

The market’s reaction to last week’s USDA acreage report was bearish, not from the projected acres to be planted but from the Quarterly Stocks report.

Spring flush is upon us. Now, that can mean different things to different people.

For a bottler and manufacturer, it means increasing milk receipts. Manufacturing time will need to be increased and, in some cases, milk will have to be diverted to other facilities willing to take it on. To sweeten the pot, milk is offered at a discount when supply is plentiful. Pricing varies throughout the country as some regions are able to handle current milk supply easily while other regions are seeing strong milk receipts.

Cheese and butter manufacturers are mixed as to the interest in purchasing extra milk. Cheese and butter prices give the indication there is limited downside price risk and therefore increasing the desire to produce more product. However, the outlook for a choppy market with limited upside price potential for the near-term keeps others cautious over extra production.

For farmers, increasing milk production means a greater milk check. More income is always better. However, that is coming with a cost. The March milk/feed ratio of 1.47 is not helping profitability. In fact, the milk feed ratio has been below 2.00 since April 2011. This has been the demise of some farms while many others are just hanging on. This year will be critical.

USDA released its "Prospective Plantings" report last week, which was considered neutral to bullish with the estimate of 97.28 million acres of corn and 77.13 million acres of soybeans expected to be planted. Gone for now are the previous predictions of 99.0 million acres of corn and $4.00 per bushel.

Prices will be hard pressed to decline to that level unless weather is ideal this summer (which is highly unlikely). Current long-term weather forecasts indicate a strong potential for continued drought in the South and Great Plains stretching up into the Dakotas. Now, this may be a smaller area than last year as more moisture has been seen in some areas, reducing the various drought areas on the Drought Monitor map. One can only hope a repeat of last year will not be seen or grain stocks will fall lower again.

The reaction of the market to the acreage report was bearish, not from the projected acres to be planted but from the "Quarterly Stocks" report that was also released at the same time. Old-crop corn futures being pushed limit down put spillover pressure on new-crop corn futures. Much of this knee-jerk reaction stems from where actual numbers fall, according to analysts’ estimates.

Quarterly stocks of corn were above analysts’ estimates but should not have caused May and July futures to decline as much as they had. Strong cash prices going into the report indicated a premium was being paid to obtain supply, and that certainly is not going to change because of stocks being higher than anticipated. Corn stocks are 624.0 million bushels less than the same time last year. Current estimated ending stocks are 632 million bushes compared to 989 million bushes last year.

So, it would seem to be a comfort that quarterly stocks are not falling as some predicted and knowing that the market is doing its job. Potential ending stocks as low as they are predicted, combined with another growing season just beginning and weather already looking to not be optimal, should cause great concern.

Declining grain prices that resulted from this report are a gift and should be taken advantage of. Those who had already purchased call options and call option spreads earlier need to roll them down to lower levels. Those who have not protected feed prices for the rest of this year and next need to step up and purchase call options. The growing season is ahead, and protecting feed prices in case a repeat of last year is experienced could mean the difference between staying in business or being forced out.

Upcoming reports:

- Global Dairy Trade auction on April 2
- March Federal Order prices announced on April 3
- February Dairy Products report on April 4
- World Agricultural Supply and Demand report on April 10

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through his website.

This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication. Those acting on this information are responsible for their own actions.

They’re not trivial, but there are more important factors, including U.S. exports and the loss of the monthly milk production report.

Milk production remains strong with the first signs of spring flush being seen at the processing level. Spring flush is not expected to be as strong as usual due to continued heavy culling.

However, production is expected to be slightly higher than last year. In the future, this will be very difficult to measure as the monthly Milk Production report will no longer be available. Actually, two key reports in the dairy industry are being discontinued after the February report is released as part of the budget cuts. The monthly Milk Production reports and the bid-annual cattle inventory reports.

This has created quite a bit of discussion in the dairy industry and rightly so. The industry will no longer be able to measure the trend of milk production and there will be no way to determine the amount of increasing or decreasing milk production, or no way of knowing the increase or decrease of cow numbers. We will not know the percentage gains or losses in individual states. In essence, the industry will be blind with only regional and manufacturer reports providing some indication as to the level of milk production. It will be very difficult for the industry to adjust to this.

USDA projects the nation’s dairy herd to average 9,195,000 head this year, slightly lower than last year. Output per cow is projected to increase to 21,960 pounds. These projections are a bit surprising as they do not seem to reflect the effects of a continued low milk/feed ratio and continued heavy culling. We are seeing another round of heavy culling as more farmers are being forced out of business while others see their feed supply dwindling.

There have been some questions as to how much impact imports are having on our milk prices. Questions generally always come up when profit margins are tight and milk prices are lower than desired. It is obvious imports do have an impact, but the impact is not as great as perceived. Cheese imports in 2012 totaled 340.0 million pounds. Net cheese imports recently exceeded exports for the first time since the end of 2009. However, some months are higher than others.

Although imports of 340.0 million pounds are substantial, it only amounts to 3%-4% of total milk production in the nation. There will always be some products that are imported due to insufficient quantities of it in our country or for various other reasons. The greater reason imports may increase is due to the strength of the U.S Dollar. Importers will bring in more product if domestic prices are high or the exchange rate of the dollar makes it attractive. On a milk solids basis, imports amount to 3.2% of total milk solids produced. Exports of dairy products were 13.2% of total milk production on a milk solids basis.

Total volume of dairy products exported in 2012 reached over just over 4.0 billion pounds. Of that amount, cheese and curd exports totaled 573.3 million pounds, up 15.8% from 2011. The total value of U.S. dairy exports in 2012 reached $5.21 billion, 8.0% above 2011 and a new record. The value of lactose products jumped 50% with an increase of $192.3 million, yogurts increased 28.7%, and whey and whey products rose 11.5%. Cheese and curd export value increased $152.2 million, up 15.9%. Ice cream and frozen desserts jumped 39.6%.

So, despite the idea that milk prices could be higher if there were no imports, this will never be a reality. There are many factors involved in dairy prices. We are competing on a global scale and prices will rise and fall accordingly.

Upcoming reports:

- The Global Dairy Trade auction in March 19
- The February milk production report on March 19
- Advanced Federal Order Class I price on March 20
- February Livestock slaughter report on March 21
- February Cold Storage report on March 22
- The Agricultural Prices report on march 27

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their 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 my not be suitable for everyone. Those acting on this information are responsible for their own actions.

This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.
The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this publication.