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July 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.

Prices Increase, But the Market Needs To Prove Itself

Jul 23, 2010

By Robin Schmahl, AgDairy LLC               

 

There certainly are some good things happening in the dairy markets. Cheese prices have made new highs for the year, with butter reaching a multiple-year high. This has created a somewhat bullish attitude among traders and farmers alike.

 

A comparison has been made to last year when the cheese price reached $1.72 in early December despite slower demand resulting from the domestic and world economic situation. So, why could not we see a repeat of this or even more as the second half of the year progresses? Prices are significantly higher than they were last year.

 

Butter has certainly reaped the benefit of a tighter market. After spending much of 2007-2009 below the cheese price, it has finally led the charge to higher prices. Butter price has long been the indicator for the direction of cheese. Many times, cheese prices would follow butter within the period of two weeks.

 

Of course, there are always exceptions to this rule as we have seen a few times in the past. Improving exports have had a significant impact on this market. For the first five months of this year, butterfat exports increased 128% over the same period last year. Butter inventory for June was 25% lower than a year ago. Stocks are the lowest they have been for the month of June since 2005 and current price is the highest it has been since 2004.

 

Earlier, there was concern over the impact on exports when the European Union was to release some of its intervention stocks. However, this concern has been put to rest as the butter price has not been impacted, with European supply remaining tight.  Actually, the U.S. butter price has risen significantly and has narrowed the gap in world prices.

 

A tight cream market has had a significant impact as well. Ice cream manufacturers as well as some other Class II product manufacturers have been competing for the available cream. More milk was diverted from bottling to cheese manufacturing when schools closed, creating a tight market in which some butter manufacturers decided to sell any extra cream rather than churn it. That has since changed due to the higher butter price, with most opting to now churn rather than sell cream.

 

Cheese is not as tight, but price still moved higher, breaking through the formidable $1.51 level and quickly moving to $1.60. Limited trading had been done on the spot market over the past few weeks. There has been a rumor floating around that more cheese would come to the spot market once price reached and exceeded $1.60. More has come to the spot market, reviving the question whether buyers will step back and see how aggressive sellers will be.

 

June cold storage indicated there is plenty of cheese in storage, limiting the need to purchase fresh cheese for aging programs. American cheese stocks are 4% higher than a year ago at 628.4 million lb., other natural cheese stocks are up 3% at 371.4 million lb., and total cheese stocks are 4% higher at 1.027 billion lb.

 

Fresh cheese demand is carrying the ball and will be key to sustained prices. Reports are that some featuring of dairy products by retailers has been significantly scaled back or in some cases cancelled due to the higher prices. Whether this will have any impact is yet to be determined.

 

June milk production was a surprise, posting an increase of 2.4% over a year ago for all 50 states. Cow numbers increase by 11,000 head, with production per cow up 64 lb. over June 2009. It is natural that a better price outlook increases the desire to produce more milk to make up for lost income. Cow numbers have increased 40,000 head since December.

 

Implementing hedging strategies has been difficult for 2011 since much of the increase in Class III futures has taken place in closer months while later months have actually declined. The market will need to prove itself before traders will be interested in putting more price premium in 2011 contracts.

 

Upcoming reports:

-          July class prices on July 30

-          July Agricultural Prices on July 30

-          June Dairy Products report on Aug. 2

-          Fonterra auction on Aug. 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.

Cheese Price Makes a New High, But for How Long?

Jul 12, 2010

By Robin Schmahl, AgDairy LLC

 

The anticipated tightening milk supply has yet to take place. Late last year, the proverbial ax was to fall on a number of dairy operations as many banks needed to be rid of bad loans. This would result in lower cow numbers, thereby tightening milk supply. 

 

However, improving milk prices at the end of the year and better futures prices for 2010 kept banks from pulling the plug. They were waiting for better milk prices in order to achieve a better return for liquidated assets. Milk prices have improved but not to the desired extent. Soon banks will be pulling the plug on farms with deep financial trouble as they just are not willing to carry them much longer. This should decrease cow numbers and eventually tighten milk supply.

 

Higher milk prices and a better outlook earlier this year resulted in farmers pushing milk production as much as possible, resulting in improving milk per cow and increasing milk production. This has tempered milk prices, with the first half of the year posting an average Class III price of $13.68/cwt.

 

This price leaves much to be desired, causing Cooperatives Working Together (CWT) to step up and remove more cows. Initially, CWT was vague as to the number of cows and amount of milk production it was going to remove. Last week, it announced that 194 bids were accepted, representing 34, 442 cows and 653.9 million pounds of milk. This announcement by the CWT did not affect the market in any way.

 

The first few times a herd retirement round was implemented, prices on the futures market jumped in response. However, when little effect was realized from the removal of cows, futures moved back in line with the underlying cash markets. Now, traders do not even take a CWT herd retirement announcement into consideration but focus on the underlying fundamentals.

 

For the first five months of this year, farmers added 21,000 cows to the nation’s herd, stopping the steep drop in cow numbers last year. In essence, the result of the latest CWT herd retirement program will be 13, 442 cows less than the end of last year. This is not enough to turn the market. This number will likely be absorbed in coming months as heifers enter the milking herd.

 

USDA increased its estimate for milk production both for this year and next year on their latest World Agricultural Supply and Demand report released last week. Milk production this year is now estimated to reach 191.2 billion pounds, an increase of 1.9 billion pounds from 2009 and up 800 million pounds from the June estimate.

 

Total milk production for 2011 is now expected to achieve 193.5 billion pounds, up 500 million pounds from last month’s estimate. USDA certainly does not think forced liquidation, CWT or low milk prices are going to slow milk production like it did in 2009 when total milk production fell below 2008. Keep in mind these are just estimates and much can and will change before it is all said and done.

 

Cheese prices last week soared higher with blocks making a new high for the year at $1.52 3/4 and the highest price since Dec. 24, 2009. It was anticipated traders would buy Class III futures more aggressively once the $1.51 level was breached, but this was not the case. Actually, many contracts traded lower as cheese price moved above $1.51.

 

Current fundamentals do not suggest continued higher prices, and this keeps traders very cautious. The pattern has been that futures began declining about a week before cash cheese declined as traders anticipated a retracement in price. We know this pattern will not be maintained forever, but indications are that it may continue through the rest of this year. With the trade being accustomed to this pattern, futures prices have been void of significant volatility and not allowing later months to add large price premiums. This makes it difficult to hedge attractive milk prices unless option strategies are implemented.

 

Upcoming reports:

 

-          Fluid milk sales on July 16

-          June Milk Production report on July 19

-          June Cold Storage report on July 22

-          August advanced Class I price on July 23

-          June Livestock Slaughter report on July 23

 

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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