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November 2010 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.

Tight Butter Supply and Falling Price: Why?

Nov 29, 2010

Why is price declining when inventory is 43% less than a year ago and exports are running consistently and significantly higher than last year? Much of it comes down to whether buyers feel comfortable with the current supply.

 
End-of-the-year demands can have strange effects on the dairy markets. It is a time when demand is higher while at the same time manufacturers tend to limit inventory before going into the seasonal lull as the calendar rolls over into the New Year.
 
Milk production and components increase as the fall and winter months progress. This increases cheese yield and the availability of milk for manufacturing and bottling. Fluid milk demand for schools results in more cream availability for production of various products. This comes at a good time as more demand requires more product availability. Any change in this balance creates some interesting volatility in these markets.
 
The window is closing for orders to be filled for the Christmas period, with most demand being confined to fill-in buying to meet retail orders. Declining prices at this time may spur additional demand. Cheese prices falling to $1.40 brought more buyers to the market looking to take advantage of lower prices. Cheese prices then rebounded as buyers became more aggressive. However, the price rebound may have run out of steam for the time being.
 
Butter has really been the star of the show for much of the year. Prices increased an impressive 92 1/2 cents from Feb. 2 through Sept. 27. Supply was dwindling from lower production and good demand. Butter price is generally considered the leader of cheese prices, but cheese struggled for a while before being able to make a sustained move higher. However, all good things must come to an end, and cheese prices began declining two weeks before butter. Once butter price began to weaken, it was Katie-bar-the-door with prices falling dramatically.
 
Butter futures prices anticipated a drop in cash price as the December and later contracts were holding a steep discount to cash. The December contract traded in the $1.60 range for much of the year, despite continued increases in the cash price. Seasonality kept this contract from following cash higher. Eventually December futures were able to increase to the $1.80 range as cash moved to, and above, $2.00 until nearly the middle of November. The decline of 70 cents on the spot market has moved the December contract lower to remain in line and converge with cash.
 
Why is price declining when current inventory is 43% less than a year ago? Why is price declining when exports are running consistently and significantly higher than last year?
 
July butter exports were up an incredible 1,052.8%, August exports were up 675.2%, and September exports increased 89% over a year earlier.
 
Much of it comes down to whether buyers feel comfortable with current supply. Orders are being filled for the Christmas season while at the same time churning has been more active. More cream is available and holiday demand will come to an end. Buyers know this.
 
Sellers are anxious to keep on-hand inventory low and want to move any extra supply to the market as quickly as possible. This causes buyers to stand back waiting for lower prices.
 
So, a tighter inventory does not mean much once the current supply is expected to be sufficient to meet demand. We all look at this the same way. If our supply of corn is expected to last, we will not purchase any more. If our hay supply is tight, but expected to last, we will not be as aggressive to purchase more. It is this psychology that has turned the market.
 
Upcoming reports:
 
-          Agricultural Prices report on November 30
-          Fonterra auction on December 1
-          California 4a/4b prices
-          Dairy Products report on December 2
-          November federal order class prices on December 3
-          World Agricultural Supply and Demand report on December 10
-          Export statistics on December 10
-          Fluid milk sales
-          California Class I price on December 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 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.

Declining Feed Prices May Offer Opportunity

Nov 15, 2010

Is it the beginning of the end for higher grain prices for the near-term? Grain prices could be steady to weaker through year’s end, giving some opportunity to lock in feed prices at a better level.

 
Cheese prices have fallen steadily over the past month and are now back to the level they were in late June. Many did not think this would be possible, given the significant increase in grain prices over the same period of time. The correlation of high feed prices to high milk prices is not holding true this time, at least not yet. In a previous article, I spelled out that this may not hold true every time. Grain markets and dairy markets follow different fundamentals and can trend differently at times.
 
One thing we do know is that high grain prices and low milk prices will increase culling, since cows that are not paying for themselves will be sent to slaughter. This, in itself, will not guarantee tighter milk supplies and higher prices. It will reduce cow numbers, which can decrease milk production. It can also cause increased milk production, since reducing overcrowding may lead to increased cow comfort and higher milk production per cow. It can also allow for heifers to be added to the herd with greater milk production potential.
 
The latest World Agricultural Supply and Demand report released by the USDA looked as if profitability was going to get worse. USDA reduced the corn crop by 124 million bushels, which reduced production to 12.54 billion bushels. With increased ethanol demand, this puts potential ending stocks at 827 million bushels, the tightest they have been since the 1995-96 crop.
 
Soybean production was cut 33 million bushels, with ending stocks reduced 80 million bushels, to 185 million bushels. The reduction of soybean ending stocks was the bullish aspect of the report, but these stocks would still be 34 million bushels higher than last year.
 
Interestingly enough, corn moved higher as post-report trading began, but it soon lost buyer interest with price declining each day since the report. In fact, Friday ended with price falling the 30-cent daily limit. Soybean price held better with a significant increase the day of the report, but succumbed to selling pressure on Friday as well, suffering limit losses of 70 cents.
 
This could be the beginning of the end for higher grain prices for the near-term. Some purchasing of grain may have been front-loaded with sales potentially declining for a period of time. China raising its interest rates and South Korea passing on some U.S. corn did not sit well with fund traders.
 
It is difficult to know how much prices will retrace or when to bottom-pick prices. Grain prices could be steady to weaker through the end of the year. This will give some opportunity to lock in feed prices at a better level.
 
If funds become more aggressive at liquidating their positions, there could be some significant downside. When it seems prices may be bottoming, it will be the time to step in to purchase call options or call option spreads to protect feed prices. I recommend options rather than forward contracting. This allows you to take a lower price if one were to develop while at the same time protect against higher prices.
 
All in all, 2011 will be another challenging year. Even though milk prices look to be lower for the first half of the year as indicated by futures contracts, milk production is still expected to remain strong. High feed prices will eventually impact milk production, possibly improving milk prices by the second half of the year. Exports have improved dramatically this year, but help also needs to come from improved domestic demand and this is still in question.
 
The U.S. economy is not as great as it was expected to be by this time. The unemployment rate needs to decline and the public needs to feel more secure about their jobs. Greater disposable income will improve consumption. Cheese inventory needs to decline for significantly higher prices to materialize.
 
Upcoming reports:
 
-          October Milk Production report on November 17
-          December Class I Advanced price
-          October Cold Storage report on November 22
-          Consumer Confidence on November 23
-          Commercial disappearance of dairy products on November 23
-          Dairy Markets closed on November 26
-          October Livestock Slaughter report on November 26
 
 
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.
 

CWT Finally Moves in the Right Direction

Nov 01, 2010

CWT’s focus on export assistance is long overdue. Under the herd retirement program, millions of dollars were spent on helping farmers get out of business. Now, money will be spent on what it should have been spent on in the beginning.

 
After a little over seven years and 10 herd retirement programs, Cooperatives Working Together (CWT) announced the discontinuation of the herd retirement program. Jerry Kozak, president and CEO of the National Milk Producers Federation, said the retirement program “has reached a point of diminishing returns, where there were a declining number of member farms that were expecting to use CWT as a means to liquidate their herds.”
 
The focus now will solely be the export market by the use of the export assistance program that has already been a part of CWT. As a result, the assessment to farmers will be reduced to 2?/cwt. rather than the current 10?. In the coming weeks, there will be an effort made by CWT to obtain the commitment of 75% of the nation’s milk from cooperatives and independent producers in order to move forward with this change.
 
I applaud CWT for finally realizing that export assistance is the way to potentially open new markets for our dairy products and thereby improve milk prices. If the nation’s dairy farmers are going to fund a project to improve price, this is the way to do it. This will take some of our excellent-quality dairy products and put them into the hands of other countries, potentially increasing export demand for those products.
 
This has been long overdue. Previously, the killing of cows through the herd retirement program was the preferred method of raising milk price with the export assistance as only a minor part of the CWT program. Export assistance was even discontinued for a period of time but thankfully resurrected in March of this year. Since then, 51.9 million pounds of cheese and 33 million pounds of butter and anhydrous milkfat have received export assistance.
 
For years, the focus was on killing cows as the only way to decrease milk production and increase milk prices at the farm level. However, statistics show this really did not work. Since the inception of the CWT herd retirement program, 2009 was the only year during which milk production decreased, even though slightly over a half million cows had been eliminated under the program.
 
The main reason for the decrease in 2009 was because of low milk prices and a higher milk/feed ratio, which resulted in heavier culling across the country. The economic crisis had far-reaching effects on the dairy industry and is still having an impact. Exports have improved and consumers have settled more into purchasing food for needs and nutrition rather than frivolous purchases. This has allowed milk prices to improve to the level last seen in October 2008. This is not because of cows being eliminated under the program.
 
Cow numbers during the period from late 2003 to early 2009 nearly steadily increased as dairy producers experienced greater profitability from better milk prices and lower feed prices. Cow numbers dropped dramatically in 2009 and have been increasing again this year. In essence, the CWT herd retirement program provided producer money to those who wanted to exit the industry. Farmers paid for farmers to get out of business. Now that millions of dollars were spent on helping farmers get out, money will be spent on what it should have been spent on in the beginning.
 
Scott Brown from the University of Missouri has shown that during the period from 2004-2009, the CWT program increased milk prices by an average of $0.84/cwt. Of that, $0.76/cwt. was added through the retirement program while $0.08/cwt. came from export assistance. However, this is very difficult to assess as the dairy industry is not a controlled environment. There were and are many market factors that attribute to both high and low milk prices. So the real impact remains very vague.
 
The important thing is that CWT is finally moving in the right direction. We do not need farmers to pay other farmers to kill cows nor do we need a quota system as is being tossed around. Focusing on improving exports and gaining market share is long overdue and more effort in this area is certainly welcomed and will have a greater impact.  
 
Upcoming reports:
 
-          September Dairy Products report on November 2
-          Fonterra auction on November 2
-          October Federal Order class prices on November 5
-          The World Agricultural Supply and Demand report on November 9
-          California Class I price on November 10
-          Fluid milk sales on November 12
-          Fonterra auction on November 16
 
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.
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