Jul 29, 2014
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July 2014 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 Bearish Outside Factors Influence Milk Prices?

Jul 21, 2014

Traders are both optimistic and pessimistic as the market sits in a precarious balance.

Fundamentals currently prevalent in the dairy industry make for a very interesting and precarious market.

Traders are optimistic about milk prices yet pessimistic over the strength of milk prices. Optimism stems from the resilience shown in cheese prices since mid-May. Since then, the cheese price has dropped below $2.00, only to find buyer interest pushing it back above that level. If this pattern continues, milk prices will remain strong through the rest of this year.

Pessimism stems from the pattern also seen since mid-May of a rebound in price unable to be maintained. Sellers are more aggressive at a higher price, resulting in selling overwhelming buyer interest. What we are seeing is a balanced market in a trading range. It is unclear what will change this pattern.

One would think outside influences would provide the catalyst to change this pattern and set a trend. However, cash and futures prices seem immune to these outside influences at this point in time. Buyers and sellers are focused on taking care of business when they need to and fill orders when they have to.

We have continued to see the disparity between world prices and domestic prices for quite some time. This has had limited influence on daily spot trading and milk futures prices. As long as demand is good and business is being done at current prices, it is immaterial what the potential impact is until it becomes a reality.

Global Dairy Trade auction weighted average prices continue to decline. The small bounce in price a month ago was little consolation to the overall weak trend. World prices have declined for 10 of the past 11 consecutive trading events with the traded weighted average price down to its lowest level since Oct. 12, 2013.

Butter price continues to run about $1.00 above world price. This may be about to run out of strength. Not that price is going to fall apart anytime soon, but I expect price to soon begin moving lower. Export interest has slowed considerably and will continue to do so as time moves on. Much of the strong export volumes seen the first four months of the year were the result of commitments made late last year and those contracts needing to be filled.

However, this is changing. May exports showed a declined of 7.5% from the previous year. This is the first month of negative exports since May 2013. The Foreign Agricultural Service indicates quota imports of butter during the first five months of the year increased 75% over the same period of time last year. So, it appears the handwriting is on the wall. The one thing that is going for us and which will support price is the fact that inventory is substantially lower than last year. Slower exports and reduced demand will be absorbed readily and will be welcomed as stocks show greater cushion. The job of the market will be to keep the scale from tipping the other way at some point down the road. The industry needs to exercise caution to balance price, supply and demand.

Grain prices are another area that will have a substantial impact on milk prices. USDA’s release of estimated corn ending stocks of 1.801 billion bushels of corn and 414 million bushels of soybeans for the 2014-15 crop year was bearish to prices. There are a few analysts who have estimated higher stocks due to good crop conditions and the lack of hot weather predicted through the pollination period. Corn ending stocks could be over 2.0 million bushels with soybeans over 500 million bushels. If this were to materialize, corn price could move to between $3.00-$3.50 with soybean price around $9.50-$10.00.

How all of this will impact milk prices is yet to be seen, but lower world dairy prices and low feed prices may likely result in lower milk prices.

Upcoming reports:

- June Cold Storage report on July 22
- June Livestock Slaughter report on July 24
- July Federal Order class prices on July 30
- Agricultural Prices report on July 31
- Dairy Product Production report on August 1

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. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this communication.


 

Lower Milk Prices May Not Mean Less Profitability

Jul 07, 2014

The market is weighing the impact that high prices may have on demand as well as how much milk supply will be available.

There is much speculation on whether the top is in for milk prices. Seasonally, one would have to say that it is not. Higher prices generally are seen in September and October. However, this year, such may not be the case.

Record milk prices were seen in April and have declined marginally since. Current futures contracts hold a discount through mid-2016, with prices hovering at $15.85. That certainly is not a very positive outlook for milk prices. Current fundamentals are mixed as to what the last half of the year will bring. Good demand continues to support the market with tighter stocks than desired heading into the time of year when demand increases as buyers look forward to expected later year demand.

Market participants are trying to weigh the impact high prices may have on demand as well as how much milk supply will be available. Feed prices and availability do not seem to be an issue this year if current weather patterns hold. Weather forecasts do not indicate a heat dome or extreme heat through the Midwest in the foreseeable future. Dairy farmers are interested in increasing milk production as much as possible to take advantage of high milk prices and profitable income-over-feed costs.

Despite good demand around the world, world prices continue to weaken. The latest Global Dairy Trade auction showed another decline in overall price, making it the ninth decline over the past 10 trading sessions and the lowest trade weighted average since Feb. 9, 2013. This will have an impact on U.S. prices and already has. It has not yet been overly negative due to previous export orders being filled from contracts made earlier in the year. More impact may be felt soon as these contracts are filled and new orders need to be placed. USDA indicated in its weekly Dairy Market News publication that international demand has slowed for both cheese and butter due to high prices. Butter is primarily the one category that may feel the greatest effect as the U.S. price is about $1.00 per pound above world price.

The recent decline in milk futures indicates traders feel cheese prices may have a greater difficulty moving back above $2.00 again. That is the reason futures declined substantially during the first week of July. Contracts through the end of the year declined nearly $1.00 per cwt., which may be difficult to regain.

It does not seem milk prices will fall out of bed, but lower prices may be on the horizon. One thing we must keep in mind is that lower milk prices with lower feed prices will not be quite as hard to swallow, but milk checks will not be as good as they had been. Price fluctuations are the nature of the market as supply and demand factors unfold.

My current hedging recommendations are the same as they had been the past three weeks, and that is to establish put option spreads consisting of buying at-the-money puts and selling puts $1.25 below the market. This provides limited downside protection while allowing upside gain. It requires no margin other than the option premium. This strategy provides substantial flexibility while also providing some protection.

Upcoming reports:

- World Agricultural Supply and Demand report on July 11
- June Milk Production report on July 18
- June Cold Storage report on July 22

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 his 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.

This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this communication.

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