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December 2008 Archive for 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.

Here we go again

Dec 12, 2008

By Robin Schmahl


The cycle of low milk prices has again returned. This is shown by the Class III futures contracts for 2009. Next year will be a time to tighten our belts again. Milk prices will be below almost everyone’s cost of production, similar to how it was in 2000, 2002, and 2006.

The average base milk price in 2000 was $9.78 and the average in 2002 was $10.42. In 2006 the average 2006 was $11.89 and the average for 2009 is currently at $14.19 per cwt. Most contracts for the first half of the year are trading below $14.00. There is some anticipation that Class III price will drop below $13.00 before it is all said and done. Earlier this summer there was an estimate released that suggested the milk price would cycle back up to high prices by late next year. However, that idea has since been abandoned due to the impact of the financial markets on potential demand.

Economic times such as how have not bee seen in quite some time. The deflationary cycle is feeding on itself and it is unclear what it will take to break that cycle. We are treading in new territory of which none of us can anticipate what will happen next. Now is the time of year when consumer buying is typically at its peak.

Dairy prices have been falling in most cases despite the strong cheese prices. At least this is extending the duration of time that better milk prices will be received. Dry whey price has fallen to 18 cents per pound; nonfat dry milk price is at 87 cents (with powder being sold to the CCC almost on a daily basis); and butter has dropped into the $1.20s. The November Class III price was announced at $15.51 per cwt. and even though it is a decrease of $1.55 from October, the price is still not too bad. If the current cheese prices are maintained for another two weeks, the December price will not be too bad either. There real concern is over prices for next year. The Holidays will be over and a period of slower demand will be upon us.

During the past two years the seasonality of the market has changed. Buyers are willing to purchase cheese during the early part of the year and pay the extra storage. Waiting became too costly as they chased the market higher in the summer and fall, many times paying more for cheese or butter than they wanted. Recently, buyers became more aggressive pushing cheese and milk prices to record highs during spring flush.

It is likely this will change again in the upcoming year due to the tight credit and the unwillingness to hold product any longer than necessary. Buying will be done only when necessary unless they feel prices are low enough to be attractive to build some cushion for later demand.  Manufacturers will limit production to orders rather than keep plants full and then market the manufactured products. Once all holiday orders are filled, I anticipate the cheese market to decline quickly and significantly. It is likely cheese prices will fall below $1.60 with a possibility of falling below $1.50 before it is over. This is the cold, hard reality.

On the bright side, the November milk/feed ratio improved, posting a ratio of 2.13. This is the best it has been since February. The fact that feed prices have dropped faster than milk prices is a blessing. This may not last indefinitely and these low prices are prompting us to sit up and take notice. The recommendation is to set target prices for feed purchases for next year. Grain markets are weak, but prices may be near the bottom, and once that is evident end-users will step up and buy for the upcoming year pushing grain prices higher. You do not want to be caught with increasing feed costs and low milk prices.

Upcoming reports to watch for are the World Agricultural Supply and demand report on December 11; the Crop Production report on December 11; the November Monthly Milk Production report on December 18; The November Livestock, Dairy, and Poultry Monthly report on December 18; and the November Monthly Cold Storage report on December 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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

 

Dairy reports take on new role

Dec 02, 2008

By Robin Schmahl

Three important reports were released last month by the USDA, but milk prices showed no reaction. These reports were the October Monthly Milk Production report, the Monthly Cold Storage report, and the Livestock Slaughter report.

One thing to keep in mind is that the information on these reports is already factored into the market in the physical aspect. The milk produced in October has already been manufactured, bottled, dried and consumed or stored. The amount of cheese and butter in cold storage has already changed over the three weeks since the end of the month.

Dairy cattle from the current report were slaughtered three weeks ago and milk production from the remaining or added cows is being processed and is moving through the pipeline. Historically, these reports were watched very closely and Class III futures would move relative to the report results. However, these reports have migrated from market moving to more of a trend indicator and barometer of consumer demand.

Monthly milk production has not shown a decrease from the previous year since June 2004, but the overall trend does show the percentage of growth is slowing. This is understandable, since production cannot grow at a similar or higher rate consistently year after year.

In 2004 the annual year over year change in milk production for the 50 states was only 0.3%. Production then jumped in 2005 as a result of record high prices in 2005 with an average monthly change of 3.5% over the previous year. The annual increase in 2006 was 2.7% and 2007 increased 2.0%. So far the change this year has been an increase of 2.4% over last year with two months yet to go. This is expected to slow down in 2009 as tight margins are expected to limit milk production growth. The USDA expects cow numbers to decrease with a possible overall herd decline of upwards of 100,000 cows. However, they do anticipate milk production to increase, but only by about 1.0%, reaching to 191.5 billion pounds according to their latest Livestock, Dairy, and Poultry report. This is well below the growth of the past few years.

Monthly cold storage reports give an indication of demand. Seasonally, stocks will increase during the first half of the year and then decrease the second half. This year, total cheese stocks increased the first half, but at a slower rate than last year. However, after peaking in June, stocks have decreased more slowly than the previous year. This trend indicates the slowing demand that is being experienced due to the economy. If you can recall, all commodity prices peaked around that time and have basically fallen ever since.

The current lower prices are attempting to find levels where demand will continue strong enough without allowing stocks to grow much further. However, with the current state of the economy, lower prices may not result in consumers increasing their buying habits anytime soon. With jobless claims last week running at a 16-year high, disposable income is becoming tighter and consumers are cutting costs wherever they can. One can only hope that consumers will not cut back much on overall spending for dairy products for nutrition sake.

The Monthly Livestock Slaughter report indicates profitability on the farm, unless of course, slaughter numbers are increased due to a CWT Herd Reduction program of which the latest round of bidding has now been closed. When the proverbial belt is tightened due to narrow profit margins, the next step is to cull cows heavier eliminating the lower producers from the herd. Periods of high milk prices generally result in lighter culling as the lower producing cows still pay their way and another heifer calf is possible from those cows. So, rather than monthly dairy cattle slaughter being a market mover, it is one of the main reports to show the state of the industry at the farm level.

All in all, these reports and others are important to the industry and will continue to be important to assess supply, demand, and pricing. These reports give us information that we need to make decisions in marketing our milk or milk products.

Upcoming reports to watch for are the November Agricultural Prices report on November 28; the California 4a and 4b prices on December 1; the October Dairy Products report on December 3; and the November federal order class prices on December 5.

 

--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

 

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