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June 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.

Grain Prices Weaken, But a Volatile Summer Lies Ahead

Jun 27, 2011

All eyes will be on USDA’s Planted Acres and Quarterly Stocks reports June 30, which could definitely be a market mover for dairy prices.

 

There has certainly been significant concern in the grain markets so far this year. In much of the Midwest and Northeast, there have been abundant snowmelt and rainfall resulting in flooding. Homes and farmland have been under water and are still under water. Continued rainfall resulted in delayed planting as well as causing the abandonment of fields. In the Southeast and Southwest, there are very dry conditions affecting crop and pasture growth. Much of what is taking place seems to be very similar to last year.

These weather problems, combined with strong demand, sent corn prices to new highs, with some projections topping $10 per bu. Certainly, lower planted acreage and reduced yield from lack of rain would affect yield and prices. The most recent World Agricultural Supply and Demand (WASDE) report supported this idea. USDA left ending stocks for the current marketing year unchanged at 730 million bushels. Furthermore, it reduced the ending stocks for next year to 695 million bushels, which would be the tightest stocks since the 1995/96 crop year. This certainly did not bode well for food prices, feed prices and profitability.

Interestingly enough, corn and soybean prices topped that day and have virtually declined ever since. Despite the weather problems and less planted acreage, weather in the Midwest has nearly been ideal for growth. States in the Midwest generally dictate the overall market sentiment during the growing season.

In the end, corn and soybean planting progress caught up to the previous year and five-year average, with crop conditions nearly right where they were last year. The question will be how many acres did get planted and what yield projections will be on those acres given those crop conditions. No doubt grain prices will be high this year, but both corn and soybean futures have fallen nearly $1 per bu. since the release of the WASDE report.

USDA will release its Planted Acres and Quarterly Stocks report June 30, which could definitely be a market mover. This will give the industry numbers to work with, along with current crop conditions to make yield and carryover projections.

The current grain futures price movement is a blessing in light of strong milk prices. June Federal Order class prices will be released on Friday, with the trade expecting a Class III price around $19.20 per cwt., while futures are projecting a July price over $20.00. If the current July price at the time of this writing were to be realized, it would be the highest price since December 2007. Of course, a lot can happen over the course of the three weeks, as July is currently being priced by the trade.

However, to put this in perspective, March corn futures in January 2008 were around $4.60 per bu. when the class prices were released. Currently, corn futures are around $6.70. So, although weaker grain prices are welcomed, it is a far cry from where the milk/feed ratio was the last time milk prices were at current levels.

Cheese prices have been strong, and both buyers and sellers are comfortable at current levels. However, buyers are not very interested in pushing prices much higher. It seems like a plateau has been reached. A decreasing butter and nonfat dry milk price suggests demand is being met. The benefit of milk movement to butter/powder versus cheese is now becoming more balanced with Class III and Class IV prices closer together.

May cold storage showed American cheese stocks decreasing from the previous month, although still remaining higher than a year ago. Stocks have had a difficult time increasing this year compared to previous years. Demand has remained strong, leaving limited supply to build inventory. This is good as inventory still is higher than it was in 1986. Total cheese stocks increased on the latest report, which is large at 1.048 billion pounds, but certainly did not increase as much as usual.

There is a lot of year yet to unfold. Let’s savor the high milk prices of the present and protect the milk prices for later. Consider using fence positions consisting of the purchase of put options and the sale of call options to allow for upside potential to the level the call option was sold. A lot can happen, and we do not want to let prices slip away if demand slows and supply becomes more plentiful.

Upcoming reports:

  • Agricultural prices report on June 29
  • June federal order class prices on July 1
  • California 4a/4b prices on July 1
  • Dairy Products report on July 5
  • Fonterra auction on July 5
  • California Class I price on July 11
  • World Agricultural Supply and Demand report on July 12

 

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.

 

Holding Strong: Dairy Price Expectations Continue to Improve

Jun 13, 2011

Tightness in the dairy market is expected to come from good demand, not from a reduction in milk production. This is good news. Improving both domestic and international demand makes for a stronger market that will hold prices higher for a longer time.


USDA made its usual and expected changes on last week’s World Agricultural Supply and Demand report for milk prices. Projected prices for cheese, butter, nonfat dry milk and whey were increased along with the All-Milk Class III and Class IV prices. These changes were expected, since USDA almost always increases its expectation for milk and product prices when cash prices and futures are increasing, and almost always lowers its expectations when prices are declining.

Last week, USDA increased the cheese price for this year by 8 cents to a projected average of $1.77 per pound. The price for 2012 was increased 6-1/2 cents to $1.71. Butter price was raised 7 cents to $1.9425, while next year’s projection was up only 1/2 cent to $1.6750. Nonfat dry milk price was increased 2-1/2 cents and is now expected to average $1.52 this year and $1.4050 next year. Dry whey was increased to $0.4750 this year and $0.4250 per lb. for 2012. Although all prices were increased, USDA expects 2012 prices to be lower compared to 2011.

Expected milk prices were increased as well, with the All-Milk price increased to $19.85 per cwt. for 2011 and $18.25 for 2012. Class III is anticipated to average $17.60 for 2011 and $16.50 for 2012. The Class IV price is projected at $19.20 this year and $17.05 next year. It appears the USDA feels Class IV will remain higher than Class III for the foreseeable future.

Interestingly, the expectation for milk production was increased to 195.5 billion pounds this year while 2012 production was decreased from the previous report to an expected 198.5 billion pounds. This leaves next year’s output at 3 billion pounds higher than this year.

According to this report, any tightness in the market will come from good demand and not from a reduction in milk production. This is good news, since we would rather have higher milk prices because of demand and not because of a reduction in milk production. Improving both domestic and international demand makes for a stronger market that will hold prices higher for a longer time.

Block cheese price has increased 42 cents since mid-May, moving to the highest level since June 2008. Buyers have been aggressive, with sellers holding back waiting for higher prices. Some have suggested prices have increased due to higher grain prices. However, this is not likely since milk production continues to increase each month. There was some impact from buyers looking for cheese due to the hold put on a significant volume of American cheese, for some reason turning buyers to other sources to cover needs. This cheese coming back to the market and the slowing of orders for replenishing aging programs could have a negative impact on prices in the near term. Last week, more cheese began trickling to the market as sellers took advantage of higher prices.

The more likely reason for the price increase is the desire for the industry to move Class III price closer to Class IV again, similar to what took place in March. This time, underlying fundamentals are a bit more supportive of higher cheese prices. This should keep the price spread between III and IV closer.

Cooperatives Working Together (CWT) voted last week to extend the program another two years beginning January 2012, providing a 70% participation of the nation’s milk supply level is reached. The current membership pledge is 68%. When this level is reached, the extension will be implemented. CWT no longer funds herd retirements but focuses on export assistance. So far this year, CWT has assisted in the export of 39.6 million lbs. of Cheddar, Monterey Jack and Gouda cheese.

Let’s all hope demand remains strong to keep milk prices higher, or at least keep pace with rising feed costs.

Upcoming reports:

- Fonterra auction on June 15
- July federal order Class I price on June 17
- May Milk Production report on June 17
- May Cold Storage report on June 22
- May Livestock Slaughter report on June 24
- Commercial disappearance report on June 28

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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