Jul 25, 2014
Home| Tools| Events| Blogs| Discussions Sign UpLogin


August 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.

Fears Underpin the Dairy Market

Aug 31, 2012

Continued herd liquidation and heavy culling raise questions about supply. Will there be enough milk to go around?

There certainly are plentiful reports of dairy farmers exiting the business. Some farms have faced foreclosure while others have just thrown in the towel due to high feed prices and insufficient crops to replenish feed inventory. There are reports of feed being hauled great distances to fill bunkers, silos and haystacks, which certainly adds significantly to the price of that feed.

Producers certainly have to push the pencil very hard to see whether this added cost will be worth it. It will depend upon the long-term goals of each operation and the current financial status. It certainly is difficult when a year like this unfolds.

Many dairy farmers remember 1988 and the lower crop yields that resulted from it. However, a greater impact is being felt this year as grain stocks are very low. Grain prices are moving high enough to slow demand in order to have sufficient stocks through the year. Even if harvest turns out better than is expected and grain futures prices decrease, it may mean little for those purchasing feed. The increased cost of hauling that feed long distances will keep cash prices significantly higher than futures prices.

Milk handlers and manufacturers have been concerned for some time now that milk supply will tighten. With schools opening, Class I demand has pulled significant volumes of milk away from manufacturers. Generally, once the pipeline is filled and cows rebound in production, there is sufficient to go around.

However, this year will not be normal. Continued herd liquidation and heavy culling may keep milk production from increasing seasonally. The July “Livestock Slaughter” report showed slaughter up 32,000 head from a year ago.

This is significant. For the first seven months of this year, dairy cattle slaughter totaled 1.762 million head. This compares to 1.665 million head during the same period last year. An increase of 97,000 head is substantial and may be only an indication of what will be seen during the upcoming year. Milk production may remain stable, with the only increase seen coming from higher cheese yields due to better milk components. Steady milk production with seasonally increasing demand is the fear underpinning the market.

Despite increased cheese and butter prices spurring the desire to manufacture more product, manufacturers are unwilling to purchase spot loads of milk at a premium over class. They anticipate milk supply to improve enough resulting in the elimination of this premium.

Nonfat dry milk prices have increased for five consecutive weeks. Strong Class I demand has reduced the volume of milk moving to dryers. Supply has tightened and spot loads are increasingly difficult to find. Those who have extra inventory are holding onto it with confidence. Downside price risk is limited or non-existent.

The strategy of selling put options $1.00 under the market as I indicated in my last column has been working well. This continues to be a viable strategy to add premium to previously hedged milk increasing your hedged price on milk contracted through the end of the year. It is a strategy that needs to be monitored closely as it is speculating milk prices will remain higher. Current market fundamentals suggest these options will expire worthless allowing you to add 25-55 cents to your milk price.

Upcoming reports:

- Dairy Products report on September 4
- Global Dairy Trade auction on September 4
- Dairy exports on September 11
- World Agricultural Supply and Demand report on September 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.
 

Dairy Herds Will Be a Tough Sell

Aug 20, 2012

A surprise in the July milk production report has dairy industry watchers rethinking their market outlook.

USDA’s recent milk production report may change the thinking of the industry to some degree. The perception has been -- and is -- for a substantial tightening of milk supply through the end of the year. The combination of a hot, dry summer with escalating grain prices sets the stage for lower milk production as adjustments are made in feeding. Increased culling is expected as feed inventory is assessed.

Milk production in July did not decline as expected. USDA reported 23-state milk production up 0.8% over July 2011, with 50-state milk production up 0.7%. This was a surprise as a decline was expected. July was a brutal month in much of the nation as milk production was suppressed by hot weather. Milk receipts at the plant level declined upwards of 15-20% in some areas as cow comfort was severely affected. Cow numbers in the U.S. during July declined by 12,000 head. Despite this, milk production remained higher than last year, resulting in 30 consecutive months of year-over-year milk production gains.

This may indicate milk production may remain stronger than anticipated for a while longer. Cooler weather will improve cow comfort and thereby improve milk production. However, the rebound may be limited as farmers deal with significantly higher feed prices. Some are considering liquidating their herds rather than paying high feed prices over the next year.

There may be some difficulty in this as most everyone is in the same position, making it difficult, if not unlikely, for another farm to purchase these cows. Very few will want to take on more mouths to feed with limited feed available. With that, feed expected to be very expensive.

Some feed suppliers are not offering forward contracts as they are not sure of being able to get supply or at what price. This is reminiscent of 2008 in the soybean and soybean meal market. That year, as a result of the inability to contract meal, farmers were reluctant to hedge milk prices, unsure of what they were going to pay. We all know what happened in 2009 when Class III milk prices fell below $10.00. I am not suggesting this will happen again. It just will be difficult for dairy farmers to sell out unless most of their cows are sent to slaughter.

If grain futures decline due to greater-than-expected yields or lower demand resulting from these high prices, it likely will not help local feed prices. Cash prices will retain a significant premium over futures due to the need to find supply any place it may be available. Some areas that normally have sufficient grain supply will have to truck it in from farther away, as local supply will not be sufficient. Hauling and available supply will add significant premiums to cash prices. I already know of one area in the Southeast that is paying $1.00-$1.50 over futures for corn. Alfalfa prices are going through the roof as farmers are scrambling to obtain supply now rather than wait until later.

The recent increase in milk futures -- pushing October through December contracts above $20.00 -- surely is good news, but it may only get us back to an average milk/feed ratio seen over the past year.

My hedging recommendation for feed is to purchase call options or call option spreads in corn and soybean meal for at least 50% of your feed, if you have not already done so. The grain markets have been moving sideways, waiting for harvest results to come in. For those who have milk hedged, consider selling put options at least $1.00 below the market to capture premium. I normally would not recommend the sale of put options by themselves, but it currently does not seem as if the milk market will see any significant decline anytime soon. Adding 40-55 cents to your hedged price by the sale of these options can reap significant benefits. This is a strategy that needs to be monitored closely.

Upcoming reports:
- July Cold Storage report on Aug. 22
- September Federal Order Class I price on Aug. 22
- July Livestock Slaughter on Aug. 24
- Consumer Confidence on Aug. 28
- Agricultural Prices report on Aug. 31


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.
 

Will California Join the Federal Milk Market Orders?

Aug 06, 2012

Red ink among Golden State dairies prompts calls for change, while the Midwest’s tightening milk supply boosts price premiums.

July certainly has been a tough month, not only in terms of heat and drought but also in terms of profitability.

Milk prices and feed prices did not keep pace with each other. The All-Milk Price for July increased 40 cents to $16.60, which was certainly good news but not in light of the substantial increase of grain prices. The average corn price jumped 99 cents per bu., increasing to $7.36, while the soybean price increased $1.70 per bu. to average $15.60.

The only bright spot of feed prices used to calculate the milk/feed ratio is the alfalfa hay price, which declined to $198.00 per ton, down $3.00. This resulted in a milk/feed ratio of 1.29 -– the lowest ever. However, it was not the lowest in terms of income-over-feed cost, which was $3.73, with the lowest occuring in June 2009 when it fell to $3.51. The income-over-feed cost is derived from subtracting the feed price consisting of the value of 51 lb. of corn, 41 lb. of alfalfa hay, and 8 lb. of soybeans from the All-Milk Price.

High feed prices and low milk prices reducing the income-over-feed costs have led to discussions about California joining the Federal Milk Marketing Orders (FMMO). The state’s 4b cheese milk price has been averaging $2.00 below the FMMO Class III cheese milk price since 2011. With margins tight or non-existent, the California Dairy Campaign (CDC) is calling for Congress to pass legislation to enable California to join the FMMO.

CDC is a grassroots organization of dairy farmers who are working to encourage lawmakers and the dairy industry to be more responsive to the needs of dairy farmers. Earlier, CDC submitted a petition to the California Department of Food and Agriculture to raise producer milk prices to be competitive with surrounding states, but the CDFA rejected the petition. The CDC is trying to build support for this change for the state. However, many dairy farmers are reluctant to back this kind of federal regulation at this point as it would mean discarding the state’s quota system.

Milk handlers indicate renewed competition for patrons in some areas. Some are offering premiums for milk, which is creating competition among milk plants. Farmers may look hard at these premiums in light of the milk price and high feed prices. This certainly is a sharp contrast to three to four months ago when premiums were eliminated, and in some cases penalties were imposed on overproduction due to the excessive milk supply.

Milk supply in the Midwest has declined to the point that spot loads of milk are commanding a premium upwards of $2.50 per cwt. This premium may increase as bottlers are already beginning to gear up for the upcoming school year.

Cheese prices have been trading in a range from $1.46-$1.72 for blocks and $1.46-$1.70 for barrels since the beginning of the year. It is interesting to note that current cash prices indicate a Class III price just above $17.00. Current futures prices for the last quarter of the year indicate cheese prices of around $1.91. If that would come to fruition, Class III futures really have no need of changing from where they already are. However, increasing cheese prices will push futures higher until each month converges to cash.

The market generally will keep a premium in contracts until such time a premium is no longer needed – unless, of course, the market is very bearish with declining prices, which will then generate an inverted market with later months lower than front months. For right now, the perception of traders is a tightening milk supply and higher prices as the year progresses.

Upcoming reports:

- World Agricultural Supply and Demand report on August 10
- Global Dairy Trade auction on August 15
- Livestock, Dairy, and Poultry report on August 16
- July milk production report on August 17


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