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August 2009 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.

Milk Price Potential Limited

Aug 31, 2009

By Robin Schmahl

Milk prices for the remainder of the year are looking a bit more positive. In fact, the August Class III price will be announced on Friday and should be the highest price so far this year.  The futures market is anticipating an August price of $11.22. This will not put the mailbox price in profitable territory, but will be better than what we have had.

It certainly is taking longer for higher milk prices to materialize than what was anticipated earlier this year. It was expected the herd reduction efforts by Cooperative Working Together (CWT) would tighten milk supply in conjunction with normal culling. However, this has not had the desired impact as production per cow has increased and demand has not picked up as much as projected.

Cheese and butter in cold storage continues to accumulate. The USDA’s July “Cold Storage” report showed American cheese stocks at 626.2 million pounds, the highest since 1986. Total cheese stocks were 982.5 million pounds and the highest since 1984. Butter stocks at 264.0 million pounds are not burdensome, but showed the first increase of stocks in July since 2004. Seasonally, butter stocks should be declining. Supplies are readily available and with inventories at these levels, it will be difficult for prices to rally significantly. Weekly cold storage reports suggest August inventories may begin to show a decrease, but this report is not as accurate due to the nature of data collection. The weekly report only surveys select storage centers across the country.

World prices have a large part to play in U.S. milk prices. World cheese prices have been lagging the increase in U.S. prices, resulting in continued interest in importing. According to the Foreign Agricultural Service, cheese and curd imports increased 7.7 million pounds or 30 percent, during the month of June. Cumulative imports for the first half of the year were 2.1 million pounds, or one percent higher than the previous year. This is adding insult to injury. Now, we need to realize that some varieties of cheese will always be imported, but when it is cost effective for companies to import versus purchasing from domestic suppliers they will many times do it. The USDA estimates imports to rise slightly in 2010, according to their latest “Livestock, Dairy, and Poultry” report, while exports are expected to continue to decline compounding the problem. They also expect milk production per cow to partially offset the reduction in herd size limiting the impact of overall production decline. Feed costs are expected to decline allowing for continued strong milk production potential.

The year ahead is full off uncertainty and much will be determined by the economic situation. An economic recovery will do a lot for improving milk prices. As consumer confidence rises so will demand. We are not out of the woods yet, but there are some signs of improvement.

Upcoming reports to watch for are the California 4a/4b prices on September 1; the August federal order class prices on September 4; the World Supply and Demand report on September 11; and fluid milk sales 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 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.

 

 

Higher Milk Pricecs to Come

Aug 17, 2009

By RobinSchmahl

It took the action of temporarily increasing the support price for blocks, barrels, and nonfat dry milk powder by the USDA to increase milk prices. Of course, these increases have yet to be realized in our milk checks, but they are coming.

The August milk price can claim limited benefit of the reaction to higher support prices. By the time this was implemented, two weeks of the August contract had already been priced by the trade. Lest you are confused by this statement, you need to realize that pricing is virtually done in a two-week delay.

To clarify this, I will use an example. One week of trading in the CME spot market determines an average price for the week, and that pre-determined price is used for cash business the following week. At the end of the second week, the average cash prices of cheese, butter, dry whey, and nonfat dry milk in the country will be used to determine the weekly NASS prices. Traders use four weeks of the spot price averages for cheese and butter to determine the estimate of the announced federal order class prices. Thus, the trade uses the average cash prices from the middle June through the middle of July to determine where the July class prices might be. This is the reason most contracts will basically trade sideways or flat-line with limited price movement for the final two weeks of the contract. Many times this sideways trade will begin earlier than the final two weeks. If you look at Class III futures charts during the final month of the contract, this will be plainly seen.

Higher milk prices are finally becoming a reality. The August Class III futures contract is trading around $11.15 and if realized will be $1.18 higher than July and the first time this year the base price will be above $11.00. This certainly is a victory and one that has been too long in coming. However, it still remains far short of profitability.

The increase in cheese prices since the raising of support prices will definitely have an impact on the September milk check. This month will begin to be priced this week. September futures are currently at $12.47 price at the time of this writing which will add nearly $1.50 to what will be received in August. With schools opening soon, cows being eliminated under the CWT herd reduction program, and buying being done in advance of holiday orders, the worst is likely behind us. The only thing that may hold back upside price potential is the high inventory levels. These will need to be reduced before supply will be tightened significantly allowing milk prices to move back above the cost of production.  

Feed prices need to be watched closely. You do not want the milk price to move higher only to find out that feed prices have been moving higher, erasing much of the gain. The USDA indicated on their latest World Supply and Demand report that there should be sufficient corn and soybeans available to meet demand. Even after they resurveyed corn acres in eight states for this report they left the planted acreage unchanged at 87 million with a production of 12.7 billion bushels. Soybean acres were raised to 77.7 million acres with a production of 3.199 billion bushels. Prices have fallen back significantly since the report, providing the opportunity to hedge feed needs for the coming year.

My recommendation for feed is to purchase call options or call option spreads if the market finishes the liquidation that it currently may be in. Purchase a near-the-money corn option and sell a call option 70 cents above for a total cost of 20 cents. Do this for corn needs through the first half of next year. Soybean meal is a little more difficult to do the spreads. I recommend purchasing futures positions for meal needs for all of next year. If you can do a forward contract with your supplies this is also recommended or do a combination of a forward contract and futures or options. Watch the market closely as a bottom needs to be confirmed first before these strategies are implemented.

Upcoming reports to watch for are the July Milk Production report on August 18, the September advanced Class I price on August 21, the July Livestock Slaughter report on July 21, the July Cold Storage report on July 21, and the Agricultural Prices report on August 31.

--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.

 

 

USDA Temporarily Increases Support Prices

Aug 03, 2009

By Robin Schmahl

USDA’s discussion of changing dairy support prices has come to fruition. Enough pressure has been put on the government to cause them to react. Agricultural Secretary Tom Vilsack stated that, “The Obama Administration is committed to pursuing all options to help dairy producers.”

As of August 1, support price for block cheese is $1.31/lb., $1.28 for barrels, and $0.92 for nonfat dry milk. These support prices will remain in effect through October at which time they will drop back unless other actions are taken. The previous support price for block cheese was $1.13, barrels at $1.10, and nonfat dry milk at $0.80/lb. Initially, discussion revolved around increasing the support price for blocks to $1.19, barrels to $1.16, and nonfat dry milk to $0.84/lb. So, this was a surprise to the industry and the milk futures market.

Class III futures contracts immediately reacted to the news from the USDA with some 2009 contracts nearly moving the daily limit of 75 cents higher. However, the gains were not maintained and only minor support was seen in 2010 contracts. More futures price strength will likely be realized as long as cheese prices increase. This was the initial reaction followed by cheese prices increasing to keep pace with the new support levels.

We need to keep things in perspective with the support price changes. First, support price only means that the Commodity Credit Corporation (CCC) is a willing buyer at that level. If it is not offered to them, they will not purchase it. In order to sell cheese to them it needs to meet grading and packaging specifications which costs in the area of 7 cents per pound. This is why cheese trades below support without any being offered to the CCC as it had done during two period of time this year. USDA stated in their news release that they anticipate the support price increases would result in the purchase of 75 million pounds of cheese and an additional 150 million pounds of nonfat dry milk.

The other thing that needs to be realized is the new support level translates to a Class III price of $11.72, given the current butter and NASS weekly whey price and a Class IV price of $11.06. This would be a significant improvement over the July Class III price of $9.97, but would be a far cry from profitability.

My concern is what will happen if the USDA does not extend the higher support prices past October. Will prices fall back down due to current heavy inventories? I believe support prices were raised temporarily with hopes that end of the year holiday demand would then take over and support higher prices. However, high inventories will be an issue through the end of the year and will be carried over into next year. 

Upcoming reports to watch for are the June Dairy Products report on August 4; the World Supply and Demand and Crop Production report on August 12; Fluid milk sales on August 14; and the July Milk Production report on August 18.

--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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