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August 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.

Surprising Weakness in Cheese Dims Year-end Outlook

Aug 22, 2011

Declining fluid milk sales, rising milk production and the unstable economic markets are also pressuring dairy prices.

 

The inevitable happened last week but came sooner than anticipated. Cheese prices fell below $2.00 -– a place where they had not been since early June. It was a surprise that it happened this early in the year and did not wait until after holiday demand was completed. 
 
Milk production suffered in July due to the hot, humid weather in many areas, decreasing manufacturing milk receipts by as much as 10%. Recently, bottling demand has increased and will continue to increase over the next weeks as schools will be back in session and the pipeline needs to be filled. Holiday demand is also right around the corner. It was anticipated this would keep cheese prices, and thus milk prices, strong for some time.
 
There is anticipation that cheese prices may remain below $2.00 for only a brief period of time. Recent weakness has cheese buyers standing back, waiting to see how low prices will go. Loads are being purchased as prices decline, but sellers remain more aggressive. Why don’t sellers hold product with the idea that school milk and holiday demand will continue to support prices?
 
The daily spot market at the CME Group is typically a market where buyers come if they need cheese or butter and cannot get it from their normal suppliers or in the general marketplace. Sellers will offer it because they have excess and need to offer it to those who are willing to purchase it. There could be other reasons that would have cheese being purchased and sold on the spot market, but it generally is for the reason I have described.
 
Right now is usually the time of year when buyers are more aggressive and supply is tighter. So far, this has been true, and it is possible the price peak has been realized early. July posted a record Class III price of $21.39, with August to break the record with an anticipated price near $21.50. Feed prices are high, and school and holiday demand is here, so why the weakness?
 
One reason for weakness is that fluid milk sales continue to decline. USDA’s latest report of fluid milk sales indicates June milk sales of all fluid products declined 1.6%. Sales for the first half of the year were also down 1.6%. This is a concern, as fluid milk consumption continues to decline.
 
Another reason is that milk production continues to increase. USDA’s latest Milk Production report, for July, indicated an increase of 0.7 percent for all 50 states. This increase came during a month when hot weather had a significant impact on production. Even though production per cow was down 3 lb. per head from the previous year, cow numbers increased 80,000 head. Cooler weather will bring back milk production to some extent, but it will take replacements and the next lactation to get production really rolling again in many areas of the country.
 
Western states were the exception this summer. Despite hot weather primarily in Texas, milk output rose steadily. The July Milk Production report showed Arizona up 4.8%, California up 4.4%, Idaho up 4.8%, Washington up 6.6%, and Texas up 8.3%. Texas has been the real surprise, as weather has been hot and dry for much of the year but production has increased consistently. Despite the adverse weather and high feed costs, this state increased milk production 7.7% in January, 8.8% in February, 7.0% in March, 7.2%in April, 8.8% in May, and 10.3% in June. 
 
The instability of financial and economic markets worldwide is definitely having an impact as well. This may cause consumers to change lifestyles and eating habits, resulting in slowing demand for dairy products. August may be the high for the year, with lower milk prices in the offing for the rest of the year. This does not mean prices will be falling dramatically, but lower prices could be with us through the end of the year.
 
Class III futures contracts for 2012 have been trading sideways to higher over the past few weeks, pushing quite a few contracts above $17.00. This triggers the price for establishing either futures sales or fence positions for price protection. I recommend purchasing $16.75 puts and selling $18.75 calls in all months as a fence position. The cost will be 50 cents. The best-case scenario is that you will be hedged at $18.75 minus the cost of 50 cents if the price increases. The worst-case scenario is a hedge at $16.75 minus the cost if milk prices fall. A double-dip economy is a possibility and could be devastating to milk prices.
 
Upcoming reports:
 
-          Commercial Disappearance report on Aug. 23
-          July Livestock Slaughter report on Aug. 26
-          Agricultural Prices report on Aug. 31
-          Dairy Products report on Sept. 1
-          August Federal Orders class prices on Sept. 2
-          Fonterra auction on Sept. 6
 
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 the firm's 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 trading may not be suitable for everyone. Those acting on this information are responsible for their own actions.

Milk Prices Are Supported – For Now

Aug 08, 2011

Enjoy high milk prices, especially with high feed prices. But there is a delicate balance being maintained. Any slight change in this balance can result in significant movement either way.

 
Milk prices continue to remain strong. USDA announced the July Federal Order Class prices last week, with Class III announced at a new record high of $21.39. This beat the previous record in July 2007 by a penny, and is welcomed news given the high feed prices being experienced. The question now is how long it will last.
 
August Class III futures currently indicate a higher price is yet to come and most likely it will. The majority of the August contract has already been priced, and futures are beginning to flat-line about 10 cents above July’s record. Subsequent months hold a discount to the cash with traders thinking a retracement may take place at any time.
 
Will dairy remain immune to the effects of the plummeting Dow and other financial markets? Initially, investors are pulling money out of some of these markets due to the uncertainty. The raising of the national debt ceiling did little if anything to calm fears in the U.S. or international markets. Now that Standard & Poor’s downgraded the U.S. debt rating to AA+ from the previous AAA rating, more concern is rippling through the markets. Eventually, this will impact consumers.
 
Last week, the monthly report on consumer spending indicated a drop of 0.2% in June, the first decline in 20 months. Income increased 0.1%, the lowest increase since September. This could spell trouble for dairy consumption and eventually prices. The argument is always made that people have to eat. That certainly is true, but diets and food products purchased can change when disposable income becomes tight. All we need to do is look back to the last recession two years ago. Class III milk prices declined into the $9 range. I am not suggesting this will happen again, and I do not really believe it will go that low. I am suggesting that milk prices certainly could decline from current levels.
 
Time of year is certainly in the favor of keeping milk prices higher for a longer period of time. Hot, humid weather over the past month has impacted milk output, with milk plants indicating a decrease of milk receipts of 10% on an average. Cheese yield has declined as a result of lower components. This comes at a time when increased volumes of milk will be moving to bottling to fill school pipelines. Higher Class I demand at a time of year when buyer interest of cheese and butter increases generally supports prices. Now throw in a significant decrease in milk production and prices could remain supported despite the outside pressure from other markets. Keep in mind there generally is a lag time in the dairy industry with pricing, so be prepared. Do not feel complacent. Utilized option strategies to establish floor prices and protect income.
 
World dairy prices are slowly declining, according to the Global Dairy Trade (Fonterra) auctions. U.S. prices will not be able to defy this weakness without limiting export ability. Major exporters of dairy products are expecting higher milk production for 2011. Argentina forecasts production to increase 4%. Australia estimates an increase of 3%, New Zealand up 5%, the European Union up 1%, and the U.S. increasing 1%.  
 
We know there are plenty of heifers waiting in the wings. A somewhat favorable milk/feed ratio could increase production significantly in the months ahead. Many dairy farmers I have talked with are planning to increase cow numbers in the months ahead.
 
For now, let’s enjoy high milk prices, especially with high feed prices, but there is a delicate balance being maintained. Any slight change in this balance can result in significant movement either way.
 
Grain prices need to be monitored closely. Financial markets are putting significant pressure on grain futures despite the concerns over production and stocks. This will give an opportunity to protect feed prices. I recommend the purchase of call options and call option spreads in corn and soybean meal before the World Agricultural Supply and Demand report on Thursday. The trade is anticipating a decrease of acres, potentially resulting in tighter stocks next year.
 
Upcoming reports:
 
  • California Class I price on August 10
  • World Agricultural Supply and Demand report on August 1
  • Fluid milk sales on August 12
  • Fonterra auction
  • July Milk Production report on August 18
  • September advanced Class I price on August 19
  • July Cold Storage report on August 22
 
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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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