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May 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.

Cheese Price Retreats From $1.50 -- Again

May 27, 2010

By Robin Schmahl, AgDairy Market

 

With the first five months of 2010 behind us, significantly higher milk prices still remain elusive. Early this year, there was no shortage of talk about how high milk prices were going to go. Much of the discussion revolved around milk prices achieving a level somewhere between $18/cwt. and $20/cwt. That stands to reason since recent history has shown a significant rebound in milk price after a year of low price.

 

There are a lot of other factors, however, involved in milk price than just seasonality. In fact, seasonality in the dairy market is a thing of the past. Recent years have shown the highest milk prices during spring flush or early summer rather than in the fall as usual. Cheese and butter buyers have changed the way they do business and are willing to pay storage for a longer duration rather than trying to outbid each other during the peak demand period in the fall season. After all, in the fall, bottlers are clamoring for fluid milk to meet school demand as well as cheese and butter buyers purchasing for increased orders.

 

There was a time early this year when it seemed as if the milk price was going to move substantially higher. Cheese price moved up to $1.51½, and the butter price moved steadily higher. The dry whey price slowly increased at the same time, pushing the January Class III price to $14.50/cwt. and Class IV to $13.85/cwt. 

 

The industry focused on the monthly Fonterra Auction as a barometer of international demand and price. Economists touted an improving domestic and world economy, stating that the worst was behind us. Yes, there were positive reports indicating a turn in the economy and that consumers were feeling better about their current situation. There were also, however, as many reports indicting a prolonged recovery was in process.

 

Increasing meat demand and lower cattle numbers have pushed the beef price significantly higher. Cull cow prices were, and still are, prompting heavier culling from the nation’s dairy herds. Despite this and a long period of low milk prices, dairy farmers rose to take advantage of an improved milk price outlook by increasing per-cow production dramatically. The goal was to make up for lost income over the past year. The last few monthly milk production reports certainly have shown this to be the case as milk production increased over the previous year.

 

April’s milk production report showed the highest year-over-year production increase since December 2008. The combination of CWT’s herd retirement program as well as heavy culling decreased milk production in 2009 and early 2010. This tide has turned once again, with year-over-year production steadily increasing. Western states had shown the largest production decline, but the pendulum is swinging. California, the No. 1 milk producing state, showed production up 100,000 lb. from April 2009. This is the first increase for the state in 17 months.

 

Increasing production is not all that bad as long as demand continues to increase. Demand and world prices have been strong for whole milk powder and skim milk powder (SMP), with weekly regional nonfat dry milk prices, futures prices and Fonterra auction prices increasing. However, recently the nonfat dry milk futures have weakened and regional prices have reached a plateau. The next Fonterra auction on June 1 will be watched for any signs of weakness. Cheese prices on the CME Group spot market have yet to surpass the price resistance level of $1.51½. Buyers begin to back off near that price level and are again stepping back.

 

Butter has been a well-supported market with good export demand. Price has fallen partially, however, as the result of the debt crisis potential in Europe and the fact that Europe announced it will release SMP and butter intervention stocks to the market.

 

All in all, milk prices have been locked in somewhat of a range, and current indications are that this may continue for awhile. Class III futures bear this out as contract prices from September 2010 through September 2011 show very little price difference, averaging $14.67/cwt. A Class III futures price of $15.00/cwt. or higher in any of the 2010 contracts is the area where options and fence hedging strategies need to be implemented. August through December contracts have reached and exceeded this price three times since early March and subsequently retreated. Another decrease in cheese prices from the $1.50 area may make this a difficult level to reach again.

 

Upcoming reports:

 

-          Fonterra auction on June 1

-          Dairy Products report on June 2

-          May Federal Order class prices on June 4

-          World Agricultural Supply and Demand report on June 10

-          California Class I price on June 10

-          Fluid milk sales on June 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

Your Goal: Protecting Price, Not Outguessing the Market

May 17, 2010

By Robin Schmahl, AgDairy LLC

 

Last week, USDA released its estimates for milk production, supply and demand, milk prices and product prices for this year as well as 2011. This was the initial estimate for 2011, and it showed some good numbers and some not-so-good numbers.

 

First of all, USDA raised the milk production estimate for this year to 190.2 billion pounds, an increase of 300 million pounds from last month’s estimate. It indicated that stronger production per cow prompted the increased estimate.

 

USDA’s initial production estimate for 2011 is for 193.0 billion pounds of milk. In a way this is quite surprising given the extended period of low milk prices and the difficulty in obtaining operating loans. In a way, however, this is not surprising since history has shown that a better price outlook results in farmers somehow getting more milk out of the cows.

 

Now, one thing we need to realize is that these estimates by USDA are not the gospel truth, and are just that – estimates. Generally, USDA changes these estimates on a monthly basis, depending on which direction the dairy product prices or futures prices are moving. So, how do these initial estimates for 2011 stack up to historical estimates and final prices?

 

Over the past five years, final milk production has exceeded the initial estimate. Previous to that, the estimate was higher than the final production number for four consecutive years. This year is on track for milk production to again exceed USDA’s initial estimate.

 

Heavier culling has been taking place over the past year from necessity as well as the result of good cull-cow prices. A large inventory of heifers has been available throughout the winter and the spring, which has likely been the result of improved milk production per cow as indicated on the monthly milk production reports.

 

Improved genetics are increasing production per cow and annual milk production. There have also been areas of the country that have been feeding excellent forage from last year, which has also improved milk production. Much of the corn from last year left much to be desired, but nevertheless milk production is increasing.

 

Cheese prices are expected to improve next year but not by very much. Price is expected to range from $1.5050-$1.6050, up from the current average estimate for 2010 of $1.5050.

 

The nonfat dry milk price is estimated to range from $1.21/lb. to $1.28/lb., up from the 2010 average estimate of $1.20, with dry whey only showing a possible slight improvement to $0.3750/lb. to $0.4050/lb. rather than the average of $0.3800 this year.

 

Surprisingly, the butter price is expected to decline, according to USDA, with the 2011 price ranging from $1.39 to $1.52 versus the current 2010 price range of $1.4450 to $1.5250.This does not give us much hope for a significant change to a cycle of higher prices.

 

There is a lot of time before these estimates are fulfilled, however, and much can happen from weather as well as forced liquidations and/or improving domestic and world demand.

 

The estimated 2011 all-milk price should range from $15.70/cwt. to $16.70/cwt, The Class III price is likely to range from $14.25/cwt. to $15.25/cwt., and Class IV from $14.15/cwt. to $15.25/cwt. These estimates are also only slightly higher than the estimates for this year.

 

The main thing producers need to focus on is not the USDA estimates, which change monthly, but what can be done to protect prices while leaving the upside open to some degree.

 

Focus needs to be put on both feed inputs and milk production. Rapid planting progress should result in lower grain prices until the calendar moves into the classic weather market of mid-June through July. Call options can be purchased to protect against higher feed prices while at the same time leaving it open to purchase at a lower price if this were to develop.

 

For milk, put options in closer months and fence strategies in later months will allow either for unlimited upside price potential or a much higher ceiling price than current futures prices are offering. These strategies may be implemented to protect income over feed costs and at least keep matters from getting worse.

 

The purchasing of a $15.00 put option and the sale of a $17.00 call option for August through December in Class III contracts can be done for an average of 50 cents.

 

The pattern has been that front-month futures contracts roll down as they converge with cash. For instance, May is basically priced and has rolled down from $14.00 where it was in February and again in April. If prices remain stronger and increase further, you can still take a higher price up to the strike price of the sold call minus the cost of the option spread. The goal should be to protect price and not outguess the market.

 

Upcoming reports:

-          The April milk production report on May 18.

-          The April livestock slaughter report on May 21.

-          The April cold storage report on May 21.

-          Commercial disappearance on May 25.

-          The May Agricultural Prices report on May 28.

-          Fonterra auction on June 1.

  

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 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.

A More Bullish Attitude Emerges for World Dairy Demand

May 03, 2010

By Robin Schmahl, AgDairy

 

Class III milk futures in May, June, July and August contracts have exhibited strengthening prices since mid-April. This stands to reason as anticipation grows for stronger dairy prices.

 

World prices are being watched very closely. Continued strength in the butter price has resulted in traders liquidating previous sold positions (shorts) to reduce their exposure. This results in steadily improving futures prices and adds extra price premium in the market. That is, extra price premium relative to the current Class III price calculation using the Federal Order formula. The updated weekly NASS prices for nonfat dry milk and whey, and the closing CME Group spot prices last week for cheese and butter, equate to a Class III price of $13.08.

 

May Class III futures have run out of steam with half of the contract already priced. Futures will begin to flat-line and trade within a tight range for the month. This has already begun the process of converging with the underlying cash markets by decreasing slightly over the past few days. Most of the adjustment in price for this contract will result from weekly NASS prices and very little from daily cash trading.

 

June, July, and August futures contracts are anticipating continued higher cash prices as traders watch global markets very closely. Later-month contracts have not been as exciting, with much of the price movement confined to a virtually sideways range. However, prices are returning to the top end of the range as the attitude become more bullish.

 

Overall demand from the world dairy market is solid. Some improvement in world economies brought consumers back to the market.

 

The demand leader is powder. China has been importing large volumes of Whole Milk Powder (WMP) and Skim Milk Powder (SMP) over the past year. This is due to a combination of heavier culling of their dairy herd due to the melamine scandal. It is estimated that about 20% of their herd was culled due to the loss of confidence by their consumers in the domestic milk supply.

 

Now, lest we get too excited over this, much of their imports have come from New Zealand. In fact, U.S. exports to China are primarily whey protein concentrate, sweet whey and lactose. In 2009, exports of whey protein concentrate totaled 47,239 metric tons (MT), sweet whey 46,313 MT and lactose 49,795 MT. Skim milk powder exports to China were only about 6,000 MT, with cheese exports about 2,000 MT. Yes, every little bit helps and there is a lot of room for growth.

 

The proverbial wrench in the works had been the recent announcement by China that they were going to ban U.S. food-grade dairy imports by May 1. They had changed their stance on a previous health certificate agreement made in 2007. This certainly was not good news last week, but it did not have any noticeable affect on cash or futures trading. On Friday, however, they granted a 30-day extension giving both governments until June 1 to work out a new health certificate agreement.

 

We have moved to a global marketplace and need to cater to the demands of consumers or lose market share. This can be a hard pill to swallow, but one that is going to shape our business going forward.

 

There certainly seems to be light at the end of the tunnel. An improving global economy and improving world dairy prices will do wonders for domestic milk prices, but it may take some time for higher prices to materialize.

 

Fall contracts already have a $2.00 price premium factored in. Increasing milk production, along with increasing cheese stocks, may be a limiting factor until some inventory clears, which may take the rest of this year.   

 

Upcoming dairy reports:

 

-          Fonterra Auction on May 4

-          California Class I price on May 10

-          World Agricultural Supply and Demand report on May 11

-          Monthly Milk Production report on May 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 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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