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April 2012 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.

Will the Farm Bill Cure What Ails Us?

Apr 30, 2012

Low milk prices and tight margins have generated quite a bit more interest in the farm bill, especially in the potential for a supply management program and the production margin protection program.

Overall, the market has not been supportive to milk prices. Both stability and weakness have been seen in all sectors and have turned traders more bearish on the price outlook. Somewhat stable cheese prices have not been enough to support Class III futures.
 
Current calculations of underlying cash prices, relative to futures, show May through July contracts at a discount to the Federal Order current price calculation as of the week ending April 27. However, weakness in dry whey is having a definite impact on price outlook. Heavy cheese production is keeping dry whey supply plentiful and readily available for demand.
 
Manufacturers are reducing prices to encourage sales. The current market setup is reminiscent of 2007 when prices reached nearly 80 cents and then fell over the next two years, dropping below 16 cents. The difference is that, in 2007, high prices impacted demand when they caused end users to find alternatives. This took some time to overcome because, once demand is affected, it takes time to bring back that demand. Now prices are declining due to heavy production and increasing supply.
 
Nonfat dry milk is facing the same issue as whey, with supplies continuing to increase. Powder production has been heavy as dryers have been absorbing some of the plentiful milk supply and running at capacity for quite some time. Regional prices continue to weaken as manufacturers cut prices and end users are purchasing on an as-needed basis. This is not just a domestic issue, Nonfat dry milk/skim milk powder prices are declining world wide. The latest Global Dairy Trade auction showed skim milk powder price down 7.6 %. All other products traded on that auction were also lower with the overall trade weighted average declining 9.9%.
 
Current price projections are for milk prices to remain depressed for the foreseeable future. Milk production remains strong. First-quarter milk production this year was up 5.2% and the strongest first-quarter growth since 2000. Cow numbers continued to increase in March, with the nation’s dairy herd up 86,000 head from a year ago. Per-cow production was up 59 lb. Even though cull cow prices are good and feed prices are high, tightening the milk/feed ratio significantly, producers are improving milk production in order to generate cash flow.
 
Low milk prices and tight margins have generated quite a bit more interest in the farm bill, especially the potential for a supply management program and the production margin protection program. A lot of debate will take place before the farm bill is finalized and adopted. Some indicate the supply management program aspect of the bill will come under extreme fire. Both the industry and dairy producers are on both sides.
 
It is interesting to note that when milk prices are high and income exceeds cost of production virtually no one wants a supply management program. When price is low and margins non-existent, many are clamoring for a supply management program. This debate has raged for quite some time but now seems to becoming closer to some form of adoption. Interestingly enough, Europe has been looking at eliminating its quota system in the next few years.
 
A concern of the current farm bill mark-up from the agricultural committee is the inclusion of this section: “Limitation. -- A dairy operation may only participate in the production margin protection program or the livestock gross margin for dairy program under the Federal Crop Insurance Act 25 (7 U.S.C. 1501 et seq.), but not both."
 
This section does not appear in the House version at the present time.
 
There will be much debate before this is all said and done. We certainly do not want an elephant that will be carried around for the duration of the next farm bill.
 
Upcoming reports:
- Agricultural Prices report on April 30
- Fonterra auction on May 1
- California Class 4a/4b prices on May 1
- Dairy Products report on May 2
- April Federal Order class prices on May 4
- World Agricultural Supply and Demand report on May 10
- California Class I on May 10
- Fluid milk sales on May 11
 
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.

The Big Push: U.S. Dairies Advance toward Record Milk Production

Apr 16, 2012

Despite increasing penalties for heavy milk deliveries, many producers continue to boost their milking output as dairy prices decline and feed prices rise.


In some of my other articles, I have written about the ever-increasing milk supply, and it remains at the forefront of dairy news.  Production during the winter outpaced the previous year by a significant margin due to mild weather.
 
This raised the idea that spring flush may not materialize due to already high milk production. However, spring flush is as strong as ever, with no slowing of milk flow. So much so that penalties are being imposed in the West while some other areas are indicating a loss of volume premium.
 
If the thought behind penalties is to deter milk production, it is not working unless some dairy producers go out of business. Most farmers are going to continue to push cows for greater production to compensate for lower prices. They will take the penalty or loss of volume premium for a short period of time to keep cows producing at their potential. They do not want to cut back on nutrition as it will affect the lactation curve of the cow.
 
USDA’s Dairy Market News indicates heavy milk receipts are resulting in unloading delays in the Northeast and Mid-Atlantic regions, reaching upward to 24 hours. Additional milk volumes are expected over the coming weeks. This is causing some problems in hauling and finding available tankers. Some plants are absolutely not taking on any more milk. A few plants in the Midwest, although full, are taking milk if it is offered at steep discounts reaching $5.00 or higher. This could be common over the next month or more.
 
Projected milk production for 2012 was increased on the latest USDA World Agricultural Supply and Demand report. USDA raised its estimate by 400 million pounds to 201.1 billion pounds and the highest production ever. If realized, this would be an increase of 4.9 billion pounds, or 2.5% over 2011, and would be the greatest annual increase since 2006.
 
Despite anticipated high milk production, milk prices are expected to remain higher than one would think based on production growth. Yes, they certainly are not as good as last year and not as good as we would like to see, but the All-Milk price is anticipated to average $17.50, compared to $16.29 just two year ago. Milk production that year totaled 192.8 billion pounds. The Class III price is expected to average $16.35, compared to $14.41.
 
The big difference comes from the price of feed. Corn prices averaged $3.55 for the 2009-10 crop year, and they’re projected to average $6.20 for the 2011-12 year. Soybean prices were $9.59 two years ago; they’re estimated to average $12.25 this year. Soybean meal prices reached $311.27 per ton two years ago, and projected to rise to $345.00 per ton this year. This tightens and, in some cases eliminates, profitability.
 
Dairy exports for cheese and whey continue to do well increasing over last year but certainly not to the extent of the previous year. February exports of cheese and curd increased 4% over the previous year, totaling 20,611.1 metric tons. Whey exports increased 2.1%, totaling 34,024.2 metric tons. Butter recorded a large decrease, down 42.0% from the previous year to 3,748.3 metric tons. Despite Cooperatives Working Together’s assistance in the exports of 37.4 million pounds so far this year, international demand for U.S. butter is suffering.
 
Milk production is expected to remain strong unless some adverse weather takes place. USDA is leaving corn carryout unchanged from the March estimates. Its anticipation of 95.9 million acres of corn potentially means lower prices will materialize.
 
Actually, December corn futures have been working slowly lower since August. It has been so subtle that most have not realized it. Prices peaked on August 31 at $6.73 1/2 and have made lower highs on each price rally since then, with a current futures price of $5.30. This trend will continue lower barring any weather problems.
 
My recommendation is to purchase put options for those who have forward-contracted corn for this year. This will lower your purchase price if corn price continues to decline. If you have extra corn that you will need to sell, do the same thing to protect the value of your corn crop. You certainly do not want to sell that corn below your cost of production.
 
Upcoming reports:
- Fonterra auction on April 17
- March Milk Production report on April 19
- May Federal Order Class I price on April 20
- March Cold Storage report on April 20
- Livestock Slaughter report on April 20
- Annual Livestock Slaughter report on April 23
- Commercial disappearance on April 24
- Dairy Products annual report on April 27
- Agricultural Price report on April 30
 
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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