Sep 22, 2014
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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.

Dairy’s Income-over-Feed Cost Is the Best Ever

Mar 03, 2014

Milk prices are breaking records and history is being made.

Dairy farm profitability is the best it has ever been, according USDA numbers released on Feb. 28. A milk/feed ratio of 2.55 is certainly not the highest it has ever been, but it the best since January 2008. However, an income-over-feed cost (IOFC) is the best in history at $15.01 per cwt.

One would have anticipated the years of the late 1990s and early 2000s, when the ratio was higher, would have produced the best IOFC, but such was not the case. The previous best IOFC was in September 2007 when the IOFC was $14.94 with a milk/feed ratio of 3.17.

We must remember that these numbers do not necessarily mean dairy producers are in the best financial position in history. These numbers are strictly a calculation of the All-Milk price divided by the milk/feed ratio to derive the IOFC. Costs of goods and services, land costs, etc., have certainly changed over the years, making this quite different for each individual farm. Each farming operation will have its own milk/feed ratio and IOFC, based on whether feed is grown on the farm, whether it is purchased, or whether it is a combination of the two. However, this does put the industry in perspective as we enjoy record milk prices.

There are numerous reasons supporting milk prices - one of them certainly being the weather. The Midwest has struggled with severe cold weather for over two months, hindering milk output. Eastern regions of the country have suffered through times of heavy snows as well as ice storms. Despite these hardships, milk production in January was 0.9% higher than last year in the country. It does look like weather will begin changing in the near future, which could allow for greater milk production growth. Other than the drought in California, good weather has prevailed in the West, with a definite division noted on the milk production report. Most Western states showed production increases while states in the East showed production declines from a year earlier.

Cheese manufacturers are also providing a reason for milk prices at lofty levels. Manufacturers are keeping production close to demand. No one wants to produce more than they need, with the desire to keep inventory from building at the plant level. If prices fall, plants do not want to be left with high-priced inventory. Cheese orders have slowed in some areas and in some varieties due to high prices, which results in plants slowing production to match this demand.

Buyers have been holding back in hopes lower prices will materialize before they need to purchase supply to build their own inventory. Any weakness in prices brings buyers in to pick up what supply they can. It appears the industry is caught in a cycle with no real answer as to what will break it out of that cycle. Despite this scenario, cheese inventory did increase in January out of necessity and not out of the desire to build inventory for later demand.

Milk continues to be diverted from cheese production to butter/powder production. This has provided ample supply for the domestic and international markets. Orders are being filled easily with inventories growing. Greater volumes of butter and Grade A nonfat dry milk are showing up at the spot market.

One thing we know for sure is that records have been are being broken and history is being made. Make sure you are taking advantage of these prices by hedging prices and paying down debt. Chances are prices will not remain like this forever.

Upcoming reports:

- Global Dairy Trade action on March 4
- World Agricultural Supply and Demand report on March 10

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. 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.

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COMMENTS (1 Comments)

Dairynomore4me - Strathmore, CA
This is great news, if only the bank could have understood that someday there would be money again in dairy. Maybe there would still be cows in the freestall my husband and I built in 1999. Maybe it would still belong to us, maybe we would someday have credit and a place to live that we would call our own. Maybe I could have a day I don't cry about how I was at the helm when all of the family equity was swept away like the clippings under the barber chair, junk, garbage. Maybe I could have a day I don't think will end in some new disaster arriving via the mail from the IRS or my accountant, or my attorney.

It was probably too late for losers like us anyway. The 2008-2009 drop was on the heels of an expansion. Too much borrowed money out there. The people that now own my house need me out and call it an "eyesore". Depressed people don't plant flowers. Across the driveway, my elderly parents can stay till they can't stay, and dad just fell again on Saturday.

Ironically, it turns out a field of our family's was adversely possessed for years. It only came out in the survey before the sale. No one thought to reimburse us. The buyer, the agent and the neighbor worked it all out nicely over lunch a full month before it changed hands. We could fight but we're already too beat up. We are aware it will get worse before it gets better for us. If it ever gets better.

I hope those still in this industry use the income to make sure collateral lines are not so tied up that they lose it all if they lose their dairy, I hope they pay down debt because the down turn will be back. I hope they never are as embarrassed to be someone as I can be some days after all of this. I hope that they are certain that the bank will treat you nice when it's all good and when it changes they will send someone that will sit at your kitchen table and negotiate commission percentages with the auctioneer as if you are not there or you are of so little value it can't matter how you feel. You will then slink around, ashamed of what you have done to your family and if fortune favors the bold, will never experience her again.
9:38 PM Mar 6th
 
 
 
 
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