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May 2011 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.

Spring Rallies in the Dairy Market Are Becoming More Frequent

May 27, 2011

Price increases in cash cheese and butter seem to provide an opportunity to hedge some milk production.

 
Cheese and butter prices have had a real turn of events over the past two weeks. Both cheese and butter prices have broken out of the sideways trading ranges established since the beginning of the year.
 
Cheese prices may now be poised to challenge the $2.00 price level set in early March. Traders certainly think this will be the case as July Class III futures have traded above $19.00. It was thought the Class III price of $19.40 in March would be the high for the year. However, that may be challenged if buyer interest remains strong.
 
In the first quarter of this year, demand for dairy products was strong. Total cheese demand was 6.4% higher than the first quarter of 2010. Commercial disappearance of butter was up 7.8% and demand for nonfat dry milk and skim milk powder was up 12.0%. First-quarter cheese inventory actually decline 21.0 million pounds versus an increase of 15.0 million pounds during the first quarter of 2010. Interestingly enough, first quarter butter inventory increased 62.5 million pounds versus an increase of 62.9 million pounds for the first quarter of 2010.
 
Milk production has been consistently higher than a year earlier, but demand has been keeping up and, in some cases, exceeding supply. Exports have been good, with domestic prices right in line with world prices. Higher milk prices with higher grain prices will keep milk production strong for the year unless weather becomes a greater factor for yield potential. If grain prices increase above current levels, milk production may eventually decline since culling will increase significantly and rations will be changed affecting milk output.
 
With the recent strength of cheese and butter prices, what can we expect? Of course, price strength always brings out the “I told you so” or the “We knew this was coming” analysts. Yes, there is always a potential for higher prices as well as lower prices. I want to make a historical comparison as to previous patterns.
 
There were four years since 1980 when prices rallied in the months of May and June. These were 1998, 1999, 2007 and 2008. The price rallies for all of these years began right at the beginning of the month of May. The price increase lasted through July 3 in 1998, resulting in a 39-cent increase in cheese price. The price increase in 1999 lasted through June 24, consisting of an increase of 26 cents. An increase of 48 cents was realized in 2007 with the rally lasting until June 22. The rally in 2008 lasted until June 5, consisting of an increase of 22 cents. During these four years, cheese prices exceeded the May/June rally 50% of the time and 50% of the time prices never reached back to that level.
 
The year 2008 was very similar with strong grain prices and most reflects the current market situation. Milk price never rallied back to the spring price despite significantly higher grain prices.
 
These comparisons would suggest that the current price increase in cash cheese and butter is providing an opportunity to hedge some milk production. Prices will not increase forever and you need to take advantage of some good prices when they are offered. Yes, price can increase further, but our risk is to the downside.
 
I continue to favor the fence strategy of purchasing a put and selling a call. Spreads of $18.00 puts and $20.00 calls can readily be done at reasonable prices. In some months, even higher spreads can be established. This allows you to follow the price up to the sold call option while at the same time establishing good downside protection.
 
Upcoming reports:
 
-          Agricultural prices report on May 31
-          Commercial disappearance on May 31
-          Dairy Products report on June1
-          Fonterra auction on June 1
-          California 4a/4b prices on June 1
-          May federal order class price on June 3
-          World Agricultural Supply and Demand report on June 9
-          Fluid milk sales on June 10
-          California Class I price on June 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.

USDA Estimates Higher Milk Production and Lower Prices

May 16, 2011

Dairy markets remain active with good demand, but strong grain prices, along with questions about hay availability and the weather, will have a bearing on the milk/feed ratio.

 
Much of the excitement in the markets over the past few weeks has taken place in cash butter and nonfat dry milk.
 
Butter staged a rally and tried to remain above $2.00 as buyers were aggressively procuring supply for future needs. However, once price reached $2.10, buyers said enough is enough and stepped back. This then caused sellers to become the aggressive ones wanting to move product rather than hold on to it. Price quickly fell below $2.00 again solidifying the sideways trading pattern likely to be maintained for the foreseeable future.
 
Churning has been active, but manufacturers are attempting to keep on-hand supply limited. There is little interest in speculating by holding supply for higher prices. Ice cream production is increasing, but cooler weather has been a limiting factor allowing more cream to be available for churning. Supply and demand seems to be balanced despite higher exports. In fact, butter and milkfat export sales in March was 102% higher than the same month a year earlier and up 30% from the previous month.
 
Lest we get too excited and wonder why price is not significantly higher, we need to look back at last year. The average butter price during March 2010 was $1.45, while the average this year was $2.06. So, this is already factored in and despite good demand, prices are remaining in a range. It is possible this price range may hold for the rest of this year as stocks are slowly building and orders are being filled.
 
Nonfat dry milk price moved lower over the past weeks. There had been a large price spread of 20 cents between Extra Grade and Grade A for a time. However, rather than Grade A moving up in price, Extra Grade finally fell and fell quickly. Current prices on the CME Group cash markets are virtually in line with regional prices rather than having the disconnect seen previously. The main reason Extra Grade price remained at $1.80 for awhile was due to no interest in trading on the daily spot market. But eventually something had to give. Exports for the month of March were 46% higher than a year earlier.
 
USDA released its first estimate for 2012 milk production last week in its monthly World Supply and Demand report. Its current estimate is for production to reach 198.7 billion pounds, up 3.3 billion pounds from the estimate for this year. Even though grain prices are expected to remain high, milk per cow is expected to increase.
 
Interestingly enough, milk prices are estimated to be lower next year. Class III price is expected to range between $15.35-$16.35 per cwt., a decrease of nearly a dollar from this year. The Class IV price is estimated between $16.30-$17.40 per cwt., a decrease of nearly $2.00 with the all-milk price between $17.35-$18.35 per cwt., a decrease of around a dollar per cwt.
 
It had been anticipated this year that milk prices would move significantly higher due to strong grain prices. March did reach $19.40 per cwt. and likely the highest price of the year. Milk production continues to increase despite higher grain prices. Farmers are able to cash-flow at these higher feed prices. They’ll continue to do so unless delayed planting weather and adverse growing weather push grain prices significantly higher than they already are. USDA did release its estimate for 2012 corn ending stocks at 900 million bushels. This keeps a tight stocks-to-use ratio and remains below the magic billion-bushel carryout number. Soybean ending stocks are expected to be 160 million bushels – comfortable but still tight.
 
A major concern this year is going to be hay availability and price. Acres of hay were to be plowed out or planted with corn to take advantage of the higher price. Wet weather may have changed some of this, but hay prices are expected to increase substantially this year. This will definitely have an impact on the milk/feed ratio. Weather is the ultimate card that will be played affecting milk price.
 
Upcoming reports:
 
-          Fonterra auction on May 17
-          April Milk Production report on May 18
-          June federal order Class I price on May 20
-          April livestock slaughter report on May 20
-          April Cold Storage report on May 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 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.

Higher Grain Prices Are Not Slowing Milk Production

May 02, 2011

Dairy producers are staying in business amid this spring’s delayed corn planting, higher cow numbers and strong milk prices.

 

Dairy markets have not been overly exciting over the past few weeks. Closer months have virtually been sideways while later months have slowly increased. Class III contracts in 2012 have made new contract highs recently.

 

A fair amount of underlying strength can be attributed to grain prices. Delayed planting is having an impact on prices. There is concern that all projected corn acres may not be planted or some of what is planted may have reduced yields. Of course, this is still too early to tell as the whole growing season makes the crop, not just planting date. Last year, planting was early, with over half the crop in by now. As of last week, corn planting progress was only 9%. One thing to keep in mind is that history has shown that between 30-40% of the crop can be planted in a week if weather conditions are good.

 

Theoretically, slow corn planting or not enough time to plant all intended acres can and will result in more soybean acres. This would potentially increase supply and thereby decrease prices. So, even though corn prices could be high, soybean prices could be lower, keeping the lid on some feed purchases.

 

So far, higher feed prices have not had much impact on milk production. The March Milk Production report indicated production was up 2.2% in all 50 states, putting first-quarter production up 2.2%. This compares to first-quarter production in 2010, which was down 0.1%. The first three months of 2010 showed production down 0.8% in January, down 0.1% in February, and up 0.6% in March from 2009. This year showed January production up 2.3%, February production up 2.1%, and March up 2.2% compared to 2010.  

 

Further comparison for the same months shows another interesting scenario. Comparing cow numbers for January 2009 to 2010 showed a decline of 226,000 for January, 199,000 fewer for February, and 193,000 for March. However, comparing January 2010 to January 2011 shows an increase of 68,000 head. February climbed by 66,000 head, and March was up 76,000 head. All of this despite significantly higher grain prices.

 

Of course, one big difference is milk prices. Class III price for January 2010 was $13.85 per cwt., February was $12.90 and March was $12.92. Class III price for January 2011 was $13.48, February was $17.00, and March was $19.40. It seems higher milk prices spur a greater desire to hold and add more cows, even though feed prices escalate.

 

High cull cow prices were still not enough to retract the cow herd. Plenty of replacements are available. The March slaughter report showed the largest amount of dairy cattle culled during a month since January 2009. For the same month, cow numbers increased 17,000 head from the previous year. All in all, it appears what is happening is trading dollars for dollars. But farmers are staying in business.

 

My recommendation is to continue to look at establishing fence positions for the second half of this year. Purchase puts and sell calls for a $2.00 price spread for about 40-45 cents. This would put a ceiling price at $19.50-$20.00 for Class III. Add your basis on top of that, and an increasing price would put you in a good position. If prices were to decline, a good floor is established. Resist the tendency to do nothing because it looks like prices will remain high or go higher. We have all heard that before.

 

Upcoming reports: 

-          Fonterra auction on May 3

-          California Class I on May 10

-          World Agricultural Supply and Demand report on May 11

-          Fluid milk sales on May 13

-          Fonterra auction on May 17

-          April Milk Production 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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