Sep 1, 2014
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AgDairy Market Update

RSS By: Robin Schmahl, Dairy Today

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.

High Prices Cure High Prices, But What about Butter?

Aug 29, 2014

Butter has really been the star of the show with a new all-time record high price established at $2.8225 on Aug. 22.

There are increasing discussions as to what the future holds for dairy prices at the end of this year, but primarily discussion is focused on next year.

Many producers are hard pressed to find a reason to hedge milk prices next year due to the substantial price discounts seen in milk futures contracts. The pattern for much of this year has been that cash prices have remained strong, requiring futures contracts to increase substantially as discounted futures needed to converge to cash. How long this pattern will continue is anyone’s guess, but we can be assured it will not last forever.

It has been a good year so far, and it will potentially remain that way through the end of the year. Demand is strong for dairy products and the push now is for obtaining enough to fill expected demand through the end of the year. Buyers are reluctant to purchase hand-to-mouth in the anticipation that prices may settle back somewhat before the end of the year and thus remain aggressive. Supplies are being purchased and forward contracted through the end of the year to make sure customers are taken care of.

Butter has really been the star of the show with a new all-time record high price established at $2.8225 on Aug. 22, 1.25 cents above the previous record set in early September 1998. Demand has been strong, especially in the export market. Exports rose nearly 42% during the first half of this year. Most of the business was the result of forward contracts being inked late last year and early this year due to U.S. price being lower than world price and very competitive. The U.S. Dollar was also lower helping to spur international interest.

Butter supply was initially forecast to increase due to butter production being projected to rise about 1%. However, manufacturers did not follow their usual pattern of aggressive churning, resulting in increasing supply. Manufacturers were aggressively producing 82% butter for the export market while keeping production in line with domestic demand. The desire was to produce what was ordered and little more as they attempted to keep plant inventory minimal.

The surge in exports and strong domestic demand resulted in butter stocks lower than desired, creating a grave concern that turned into buyer frenzy. Supply needed to be purchased whatever the cost and one company outbid the other to get it. Some in the industry believe price is way too high and may result in the loss of market share. We know our exports, although good, have been slowing. Exports in the second quarter have declined 35% from the amount posted in the first quarter. The Foreign Agricultural Service will release July export numbers early in September, giving us a good indication of the impact from high butter price and the increasing U.S. Dollar.

It is interesting to note that the last time July butter stocks were this low was in 2001. July butter stocks this year totaled 170.2 million pounds with the August price setting a new record. Butter price in August 2001 reached $2.2250, with July butter stocks at 112.3 million pounds. While making the same comparison to the previous price record set in 1998, butter stocks in July of that year totaled 51.0 million pounds.

Demand had consistently grown and the bright spot has been the increase of international market share. The industry needs to be careful that we do not sacrifice market share for the sake of the personal preference of larger supply or on the perception that supply will run out even though manufacturing continues. It is a balancing act and one that needs to be accomplished decently and in order.

Upcoming reports:

- August Federal Order class prices on September 3
- July Dairy Products report on September 4
- Milk cows and production final estimates 2008-2012 on September 4
- World Agricultural Supply and Demand report on September 11

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 communication.


 

Good Times for the U.S. Dairy Industry

Aug 18, 2014

It’s all there: increased milk production, higher prices and strong demand.

Both the cheese and butter spot markets have been very resilient, with price dips being short-lived. Demand has been strong and continues to be strong according to the amount of product being traded on the daily CME group spot market. Just last week alone, there were 59 loads of butter traded while price was able to rise 26 cents over the course of the week. Although not quite as many loads of cheese have been traded, activity has been steady with most weeks showing double-digit volumes traded.

There continues to be a disconnect between world prices and domestic prices. Domestic demand is strong as buyers look to satisfy orders for upcoming end of the year demand. Consumers are willing to purchase what they want regardless of price. There seems to be a switch away from the myriads of process and packaged foods available to more of the food staples. Record beef prices have done little to slow demand. Strong dairy prices are experiencing the same thing. Demand is good and supply is less than desired for this time of year.

Milk production continues to improve, with production this year expected to reach a record 206.0 billion pounds, up 4.8 billion pounds from last year. In fact, milk production has exceeded the previous year in 15 of the past 17 years. The two years showing a decrease from the previous year were 2001 and 2009.

With increasing milk production, we have naturally seen an increase in cheese and butter production. This stands to reason as fluid milk consumption continues to decline on a yearly basis.

So, where has, and is, the greatest growth in cheese production taken place? Over the past years, the Western and Central regions have been battling it out for greatest growth in production. The Central region still continues to outpace the West with 45% of the nation’s cheese being produced, compared to 42% in the West. One would think that higher milk production would also be the case in those areas, but that is not the case. Last year, milk production in the West and Central regions ran neck-and-neck at 42% of the nation’s milk in each region.

Butter is a different story as the West far outpaces the Central region by 13%. The West supplied 52.0% of the nation’s butter last year. However, despite increased butter production last year, demand grew at a greater pace. Export demand increased substantially, resulting in the inability of inventory to keep pace with the previous year. Current butter inventory is 40% below last year and the reason price reached $2.66 per pound last week. Buyers are running scared and have been outbidding each other in the attempt to obtain supply for upcoming demand.

Inventory is expected to slow its descent now that the market has virtually been able to severely reduce export interest, especially in light of the Russian ban on dairy products from the European Union, Argentina, Norway and the United States. This does not affect us directly, but will indirectly over time. The U.S. has not exported any dairy products to Russia since 2010 due to certification issues. However, a backup of dairy products in the other listed countries will result in lower prices and the desire of those countries to move more product to different areas of the world.

So, with lower prices in the world compared to our high price, one has to assume that U.S. export business will slow as Argentina, the European Union and Norway move product to other areas of the world. This will eventually allow more to be available domestically and will reduce our market share. This business will be difficult to get back again as we have seen in the past. Right now, the market is focused on our tight supply and reduced inventory, allowing prices to remain high for the time being.

Upcoming reports:

- July Milk Product report on August 19
- Global Dairy Trade auction on August 19
- July Livestock Slaughter report on August 21
- July Cold Storage report on August 22
- Agricultural Prices report on August 28
- August Federal Order class prices on September 3


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 communication.

The Goal is More Milk

Aug 04, 2014

In today's market, strong domestic and international demand is driving the need for larger milk supplies.

The goal of dairy producers is to keep cows healthy and happy so they will produce as much milk as possible.

Large strides have been made over the years in the area of cow comfort and feeding practices. Technology has been, and is being, discovered to enhance and monitor nearly all areas of the dairy operation. It takes money to make money in all business, and dairying is no exception. We know the effects on milk production if cows are uncomfortable. We know the effects if rations are not balanced and feed additives are skimped on because of cost. We know the effects of uncleanliness and poor milking practices. These are what we try to avoid.

One way to increase milk output is to cull low producers and replace them with better genetics and higher-producing cows. This is an ongoing practice on each and every farm as cows need to pay their own way. Over the past few years, culling has been more aggressive as it took more milk production in order for a cow to pay for itself. Skyrocketing corn and soybean meal prices increased the level of breakevens. Profitability was limited or non-existent in many cases. But with increasing cull-cow prices, some of the shortfall in milk income was made up by selling cows, resulting in reduced feed requirements for the herd. Dairy producers did what they had to do in order to pay the bills.

Now, that practice has changed to some extent. High milk prices this year and declining feed prices have improved income over feed costs and profitability dramatically. The first seven months of this year showed a Class III average price of $22.48, a Class IV price of $23.19, and an All-Milk price average of $24.21. All of these are record averages for this time of year and are well on their way to record prices for the year.

So, despite continued high cull-cow prices, high milk prices and low feed prices have reduced breakevens, allowing for more cows to be kept in the herd. We see this trend on monthly slaughter reports released by the USDA. Dairy cattle slaughter in June totaled 199,000 head. This is the lowest monthly slaughter since June 2008 and has shown a steady decline so far this year. At the same time, the overall nation’s milking herd continues to increase, with cow numbers in June reaching 9.266 million head, the most since April 2012. We can clearly see the desire to produce as much milk as possible. In today’s market, this is a necessity as demand is good both domestically and internationally.

What becomes more interesting is when a comparison is made with milk prices and feed prices. In April 2012, when cow numbers totaled 9.271 million head, the All-Milk price was $16.80 with an income-over-feed-cost of $5.21 per cwt. The last time monthly dairy cattle slaughter was this low, the All-Milk price was $19.30 with an income of feed costs of $9.03 per cwt. The most recent All-Milk price was $23.40 with an income-over-feed-cost of $13.81. These statistics show that high milk prices increase the desire to produce more milk to capture better returns while low prices necessitate pushing production and cow numbers for the purpose of improving the size of milk checks.

The dairy industry seems to be in a different posture presently with demand absorbing production, extending the period of time of high prices. How long milk prices will be able to hold at these levels is unclear, but enjoy them while they are here.

Upcoming reports:

- California Class I price on August 8
- World Agricultural Supply and Demand report on August 12
- July Milk Production report on August 19

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 communication.

 

Will Bearish Outside Factors Influence Milk Prices?

Jul 21, 2014

Traders are both optimistic and pessimistic as the market sits in a precarious balance.

Fundamentals currently prevalent in the dairy industry make for a very interesting and precarious market.

Traders are optimistic about milk prices yet pessimistic over the strength of milk prices. Optimism stems from the resilience shown in cheese prices since mid-May. Since then, the cheese price has dropped below $2.00, only to find buyer interest pushing it back above that level. If this pattern continues, milk prices will remain strong through the rest of this year.

Pessimism stems from the pattern also seen since mid-May of a rebound in price unable to be maintained. Sellers are more aggressive at a higher price, resulting in selling overwhelming buyer interest. What we are seeing is a balanced market in a trading range. It is unclear what will change this pattern.

One would think outside influences would provide the catalyst to change this pattern and set a trend. However, cash and futures prices seem immune to these outside influences at this point in time. Buyers and sellers are focused on taking care of business when they need to and fill orders when they have to.

We have continued to see the disparity between world prices and domestic prices for quite some time. This has had limited influence on daily spot trading and milk futures prices. As long as demand is good and business is being done at current prices, it is immaterial what the potential impact is until it becomes a reality.

Global Dairy Trade auction weighted average prices continue to decline. The small bounce in price a month ago was little consolation to the overall weak trend. World prices have declined for 10 of the past 11 consecutive trading events with the traded weighted average price down to its lowest level since Oct. 12, 2013.

Butter price continues to run about $1.00 above world price. This may be about to run out of strength. Not that price is going to fall apart anytime soon, but I expect price to soon begin moving lower. Export interest has slowed considerably and will continue to do so as time moves on. Much of the strong export volumes seen the first four months of the year were the result of commitments made late last year and those contracts needing to be filled.

However, this is changing. May exports showed a declined of 7.5% from the previous year. This is the first month of negative exports since May 2013. The Foreign Agricultural Service indicates quota imports of butter during the first five months of the year increased 75% over the same period of time last year. So, it appears the handwriting is on the wall. The one thing that is going for us and which will support price is the fact that inventory is substantially lower than last year. Slower exports and reduced demand will be absorbed readily and will be welcomed as stocks show greater cushion. The job of the market will be to keep the scale from tipping the other way at some point down the road. The industry needs to exercise caution to balance price, supply and demand.

Grain prices are another area that will have a substantial impact on milk prices. USDA’s release of estimated corn ending stocks of 1.801 billion bushels of corn and 414 million bushels of soybeans for the 2014-15 crop year was bearish to prices. There are a few analysts who have estimated higher stocks due to good crop conditions and the lack of hot weather predicted through the pollination period. Corn ending stocks could be over 2.0 million bushels with soybeans over 500 million bushels. If this were to materialize, corn price could move to between $3.00-$3.50 with soybean price around $9.50-$10.00.

How all of this will impact milk prices is yet to be seen, but lower world dairy prices and low feed prices may likely result in lower milk prices.

Upcoming reports:

- June Cold Storage report on July 22
- June Livestock Slaughter report on July 24
- July Federal Order class prices on July 30
- Agricultural Prices report on July 31
- Dairy Product Production report on August 1

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 communication.


 

Lower Milk Prices May Not Mean Less Profitability

Jul 07, 2014

The market is weighing the impact that high prices may have on demand as well as how much milk supply will be available.

There is much speculation on whether the top is in for milk prices. Seasonally, one would have to say that it is not. Higher prices generally are seen in September and October. However, this year, such may not be the case.

Record milk prices were seen in April and have declined marginally since. Current futures contracts hold a discount through mid-2016, with prices hovering at $15.85. That certainly is not a very positive outlook for milk prices. Current fundamentals are mixed as to what the last half of the year will bring. Good demand continues to support the market with tighter stocks than desired heading into the time of year when demand increases as buyers look forward to expected later year demand.

Market participants are trying to weigh the impact high prices may have on demand as well as how much milk supply will be available. Feed prices and availability do not seem to be an issue this year if current weather patterns hold. Weather forecasts do not indicate a heat dome or extreme heat through the Midwest in the foreseeable future. Dairy farmers are interested in increasing milk production as much as possible to take advantage of high milk prices and profitable income-over-feed costs.

Despite good demand around the world, world prices continue to weaken. The latest Global Dairy Trade auction showed another decline in overall price, making it the ninth decline over the past 10 trading sessions and the lowest trade weighted average since Feb. 9, 2013. This will have an impact on U.S. prices and already has. It has not yet been overly negative due to previous export orders being filled from contracts made earlier in the year. More impact may be felt soon as these contracts are filled and new orders need to be placed. USDA indicated in its weekly Dairy Market News publication that international demand has slowed for both cheese and butter due to high prices. Butter is primarily the one category that may feel the greatest effect as the U.S. price is about $1.00 per pound above world price.

The recent decline in milk futures indicates traders feel cheese prices may have a greater difficulty moving back above $2.00 again. That is the reason futures declined substantially during the first week of July. Contracts through the end of the year declined nearly $1.00 per cwt., which may be difficult to regain.

It does not seem milk prices will fall out of bed, but lower prices may be on the horizon. One thing we must keep in mind is that lower milk prices with lower feed prices will not be quite as hard to swallow, but milk checks will not be as good as they had been. Price fluctuations are the nature of the market as supply and demand factors unfold.

My current hedging recommendations are the same as they had been the past three weeks, and that is to establish put option spreads consisting of buying at-the-money puts and selling puts $1.25 below the market. This provides limited downside protection while allowing upside gain. It requires no margin other than the option premium. This strategy provides substantial flexibility while also providing some protection.

Upcoming reports:

- World Agricultural Supply and Demand report on July 11
- June Milk Production report on July 18
- June Cold Storage report on July 22

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 his 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. 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 communication.

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