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August 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.

Dairy Price Outlook Declines As Milk Production, Exports Improve

Aug 23, 2010

Cheese and butter prices have exceeded many market analysts’ expectations, and that is a good thing. 

The August Class III milk price will exceed $15.00/cwt. for the first time since December 2008. Traders are currently predicting the August price will be near $15.12/cwt. as, for all practical purposes, the price is set. Traders calculate the daily and weekly spot trading and get a good idea of where the weekly NASS prices will be.
The strength in cheese and butter prices almost assures a September Class III price higher than August, improving cash flow and making dairy farming a bit more enjoyable.
Lest we get too complacent with the idea that milk prices are on their way up and will continue to do so, we need to keep a few things in mind. I do not want to sound bearish here, but sometimes market strength of the moment can cloud our judgment and make us complacent. There are a few things to keep in perspective.
First, exports are increasing over last year, with June exports of cheese up 85% over a year ago. Exports of butterfat increased 244%, skim milk powder increased 78%, and exports of whey proteins increased 44% over a year earlier. This is certainly good news, and tighter milk supply in other countries has allowed the U.S. to be a greater world supplier.
Second, the July milk production report showed production increasing 2.9% in the U.S. This is the highest year-over-year percentage increase since June 2008 -- and this during a hot, humid month of the year. Cow numbers have increased 63,000 head since the end of 2009. In July alone, cow numbers jumped 20,000 head from the previous month. Heifers are coming into the herds and production per cow is rising.
This continuing growth prompted the USDA to raise its estimate of milk production for both this year and next. In the latest World Agricultural Supply and Demand report, USDA projected 2010 milk production to reach 192.0 billion pounds., an increase of 800 million pounds from its July estimate. Milk production for 2011 was increased 1.1 billion pounds to a new estimate of 194.6 billion pounds.
My hope is that the economy will improve, unemployment will decline, and more disposable income will be available to consumers, which would improve demand and use this extra production rather than increase inventory.
Third, cheese stocks continue to grow. July cold storage showed increases of 11.9 million pounds of American cheese, 1.0 million pounds, of Swiss cheese and 10.8 million pounds of other cheese, pushing total cheese inventory to 1.049 billion pounds. Although fresh cheese is traded on the CME Group’s daily spot market, these stocks will need to be reckoned with. This growth shows demand in July was met and cheese still moved to inventory despite rising prices.
July butter stocks surprisingly increased after decreasing in June. Butter supply is tight, with churning activity lower due to tight cream supply and the desire of some manufacturers to sell cream rather than churn it due to price advantage. Last week, price surged above $2.00 to settle last week at $2.04 and the highest price since Dec. 3, 2004.
The market is taking all of this into consideration, resulting in closer month Class III futures trading near the underlying cash, while later contracts continue to show a discount. In fact, most contracts in the first half of 2011 have been slowly eroding, with prices now struggling to hold above $14.00. Traders anticipate a surge in milk production as well as improving components when weather cools and feed intakes improve.
There has been some panic that has emerged, causing some farmers to step up and forward contract a portion of their milk. This is well and good if this will meet your objectives. I prefer using either put options or a fence position for the first half of next year as it allows one to take a higher price. With the fence strategy, look to sell a call option $2.00 above the strike price of the put option you purchase. Worst case scenario with a fence is that you would be selling Class III milk at $16.00.
We need to abandon the prevailing idea that milk prices just “have to go up.” They currently are going up, but along with it is the desire to push production as hard as possible to make up for lost income. This may keep upside price potential under wraps for a while longer.
Upcoming reports: 
-          The Agricultural Price report on Aug. 31
-          Fonterra auction on Sept. 1
-          California 4/4b prices on Sept. 1
-          August federal order class prices on Sept. 3
Robin Schmahl can be reached at 877-256-3253 or through their website at
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.

Milk Supply Tightens, But Will It Be Enough?

Aug 06, 2010

By Robin Schmahl, AgDairy LLC


For some time now, trading activity on the spot market has been very limited. Prices have moved many times by unfilled bids or offers. Fortunately, unfilled bids or limited trading has been supporting prices. Milk prices for August and September look promising. Slight declines are seen for November and December, but still relatively good prices compared to 2009.


The concern is that 2011 contracts continue to side lower even though cheese and butter prices are strong. In fact, Class III futures contracts for the first quarter of 2001 have fallen around 20¢ since cheese prices began rallying at the end of June.


Traders view the present market strength to be a combination of lower components, hot weather reducing milk production, and milk beginning to move to the Southeast for bottling to fill the school pipeline. Milk will moved to that region because it is a deficit area, but all areas of the country will be bottling more milk for schools. This will decrease the volume of milk available for manufacturing cheese, butter and other products. The available supply will tighten, but will it tighten enough to cause cheese and butter prices to continue to rise?


Cheese inventory is high and the highest it has been since the mid-1980. This is a factor to be reckoned with and will limit buying for aging programs. However, fresh cheese is carrying the ball, and enough demand for it will keep prices higher. Inventory should decline during the second half of the year as demand ramps up for cheese, causing suppliers to reach back into inventory to supplement orders. The weekly cold storage reports suggest otherwise as stocks in these selected warehouses during July indicated a slight increase for both cheese and butter.


CME Group’s recently introduced cheese futures contract is showing some good promise. Trading has been somewhat steady, but certainly nothing to write home about. Current open interest is 206 contracts with trading activity taking place most days.


A new market always takes time. Eventually, open interest and trading activity will increase. This contract adds another indicator to the toolbox for getting a feel for the market. Current futures show slight increases in cheese prices for the next two years, with the highest price being listed in July 2012 at $1.70. The trade presently does not think cheese futures need to hold much price premium, with a wait-and-see attitude being exhibited. Active trading in cheese futures has so far been confined to contracts out to the end of 2011, with prices in 2012 just being posted prices. Of course, these are futures contracts and a lot can change over the next two years.


Global markets are mostly steady, other than the evidence of weakness seen in Fonterra’s monthly auctions. The latest auction resulted in price decreases of 7.7% for whole milk powder, skim milk power price declined 8.9%, and anhydrous milkfat fell 7.6%. This may not seem like much, but the fact that whole milk powder and skim milk powder have fallen 25% since April while anhydrous milkfat has declined 19% over the past two months speaks volumes. Domestic nonfat dry milk supplies are growing, sending regional prices lower on an almost weekly basis.


My current marketing recommendation is to purchase put options on corn you expect to harvest for feed and any that you will be selling after harvest. The purpose of purchasing put options on corn that you will be harvesting for feed is simply to protect the value of the crop. These put options can then be lifted once harvest is complete and corn silage is chopped.


The recent run-up in corn price was largely due to spillover from the surge in wheat. There is some real risk to the downside for corn price. Protecting the higher value of your crop is a good marketing strategy. I realize those farmers who are in the South may already be harvesting or done harvesting, but the recent price increase bears taking a look at for those who have yet to harvest.


Upcoming reports:

-          California Class I price on August 10

-          World Agricultural Supply and Demand report on August 12

-          Fluid milk sales on August 13

-          July milk production report on August 18

-          Livestock, Dairy, and Poultry report on August 18

-          September federal order Class I price on August 20

-          Livestock Slaughter report on August 20

-          July Cold Storage report on August 20



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


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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