Sep 18, 2014
Home| Tools| Events| Blogs| Discussions Sign UpLogin


May 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.

Beware the Euphoria: Rising Milk Prices Yield a Brighter Outlook, But . . .

May 25, 2012

Although milk futures have rallied, exercise caution when attempting to out-guess the market. Here's what you should base your marketing decisions on.

It certainly has been an exciting May for milk futures. Earlier in the month, the June and July Class III contracts were near the $14.00 level. Since then, prices in those contracts have rallied nearly $2.00. This strength changed the psychology of the market to a brighter outlook for milk prices. More articles have appeared indicating stronger milk prices are a real potential by the end of the year.
 
This is usual as market movement, either up or down, will bring out more bullishness or bearishness with supporting ideas by analysts. USDA makes its price estimates based on market movement as well. It has been decreasing price estimates for milk and products for a number of months. You can almost bet on USDA raising its estimates on the next World Agricultural Supply and Demand report to be released on June 12, unless prices fall back again.
 
There is validity in the idea that weather will have an impact on milk supply, as hot summer weather depresses milk production and components. Bear in mind this is seasonal, and not a surprise. Farmers have made great strides in reducing the impact on cows from hot weather.
 
Caution needs to be exercised when attempting to out-guess the market. Many marketing decisions have been made, or not made, based on published analysis and price potential. The bottom line is that marketing decisions need to be based on a combination of fundamentals and profitability of the farm. I cannot stress this enough. As a broker, I have seen many opportunities for hedging lost due to analysis about an outrageous idea for milk prices or capitalizing on a possibility that may or may not happen.
 
A case in point is a recent article on the potential for a significant tightening of the milk supply due to a warmer-than-average May and warmer-than-usual summer. Although this certainly can come to fruition, it is still just a forecast that could change in the next few days since forecasts are continually updated.
 
We should certainly be glad Class III futures have rallied as much as they have this month. However, be cautious as the euphoria of the moment may not last if the underlying cash market does not follow. It certainly has been a victory for cheese prices to hold as strong as they have in the face of weakening world prices.
 
The latest Global Dairy Trade auction showed further weakness in the overall trade-weighted average. This was the third consecutive event posting a decline, and the lowest average since August 2009. In fact, over the past 12 events, there have been only three that had an increase in the overall trade-weighted average from the previous event. The Cheddar cheese price on this global event settled at $1.30 per pound, indicating the U.S. price potential for cheese is limited unless world prices strengthen.
 
Milk production remains strong as shown on the April “Milk Production” report released by USDA. Production was up 3.2%, with production per cow up 40 lb. from a year earlier, and cow numbers up 5,000 head from the previous month. The nation’s dairy herd is up 90,000 from a year ago, totaling 9.272 million head. May milk is expected to continue increasing over last year.
 
This report -- coupled with the “Cold Storage” report showing American cheese inventory up 5.8 million pounds to 628.4 million pounds, Swiss cheese stocks at 28.9 million pounds, and other cheese inventory growing by 13.1 million pounds from last month to 367.6 million pounds to push total cheese up 18.8 million pounds to 1.024 billion pounds -- does not indict price strength. Also on the report, butter inventory grew by 45.6 million pounds to a total of 253.9 million pounds. This is 79% higher than a year earlier and the largest year-over-year increase ever. 
 
Look for opportunities to price milk for the year with strategies that will allow you to capture some upside price potential. Do not become complacent in marketing due to recent price strength.
 
Upcoming report:
- Commercial disappearance on May 29
- Agricultural Price report on May 31
- June Federal Order class prices on June 1
- California 4a/b prices on June 1
- Fonterra auction on June 5
- Dairy exports statistics on June 8
- Fluid milk sales report on June 8
- California Class I price on June 8
- World Agricultural Supply and Demand report on June 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.
 

U.S. Farmers Are Not the Only Ones with Low Prices

May 14, 2012

USDA forecasts more milk from U.S. dairies. World prices decline as increased production in other countries leads co-ops to cut prices to remain competitive.

Dairy prices certainly do not look good. Cheese and butter prices gave the impression a number of times that a bottom was being established. However, these were false impressions. Slower disappearance and continued heavy production keep supply greater than demand. Emotions are running high as profitability is virtually non-existent. Yet, milk production continues to outpace last year. According to estimates by the USDA, this should continue for the rest of the year.
 
USDA’s latest World Agricultural Supply and Demand report released last week indicates increased milk production and lower prices. The recent estimate shows 2012 milk production at 201.9 billion pounds, up 800 million pounds for the April estimate. If realized, this would be an increase of 5.7 billion pounds over the previous year, the largest year-over-year increase since 2005.
 
USDA lowered milk and product prices for the year. The latest All-Milk price was reduced 35 cents from the April estimate to a range of $16.90-$17.40 for 2012. Class III price was lowered 30 cents to $15.80-$16.30.  Class IV was reduced 85 cents to the range of $14.50-$15.10. The cheese price was reduced 3 1/2 cents from April estimate to an average $1.58 for the year. The butter price declined 6 1/2 cents to average $1.46, and the nonfat dry milk price declined 6 1/2 cents to $1.2550. The dry whey price was raised a penny to an average of 57.5 cents per pound.
 
It seems like weather is virtually the only item that can reduce milk production. High feed prices are not causing farmers to slow production. In fact, the opposite is true as lower milk prices spur greater production in the effort to increase cash flow. Culling becomes more aggressive as farmers eliminate lower-producing animals and quickly replace them with heifers that have a greater potential.
 
When milk prices do improve, it is the result of increased consumer demand or adverse weather. Weather over the past six months has been very mild and conducive to milk production. Consumer demand leaves something to be desired with disposable income tighter. Consumer buying habits have changed. Although cheese consumption is slightly higher than last year, butter demand has slowed. Heavy manufacturing schedules keep supply readily available, making buyers less concerned over potential market tightness.
 
U.S. farmers are not the only ones facing reduced milk prices and difficult financial times. World prices are lower also, in part by increased production in other countries. Production in Australia increased 4.1% over the past 10 months to the highest production in six years. Europe’s production is running 2-3% ahead of last year. Production is New Zealand is expected to be up 6% over 2011, which was already up 10% over 2010. This has resulted in lower prices in many countries as co-ops cut prices to remain competitive. This has reduced farm profitability significantly. This has been reflected the past few Global Dairy Trade auctions through weaker prices.
 
Hedging a profitable price has become difficult or non-existent. The only plausible way of doing it now is to initiate a fence position with the purchase of puts and the selling of calls a dollar apart. This would at least provide a floor from prices declining further while allowing for the potential of capturing a dollar to the upside if prices were to increase. You want to be sure you are not selling the call option side of this strategy if they are below the cost of production. Hindsight is always 20/20, and a lot of price opportunity has been given up since the beginning of the year. But rather than blaming the dairy industry for lower prices, continue to look for market opportunities in the future.
 
Upcoming report:
 
-          Fonterra auction on May 15
-          Federal Order Class I price on May 18
-          April Milk Production report on May 18
-          April Cold Storage report on May 22
-          April Livestock Slaughter report on May 25
 
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.
Log In or Sign Up to comment

COMMENTS

 
 
 
The Home Page of Agriculture
© 2014 Farm Journal, Inc. All Rights Reserved|Web site design and development by AmericanEagle.com|Site Map|Privacy Policy|Terms & Conditions