Uncertain Dairy Recovery, Plenty of Replacements Available
Feb 01, 2010
By Robin Schmahl
Dairy cash and futures markets continue to experience significant volatility. The beginning of 2010 has many traders and those in the industry scratching their heads and wringing their hands.
Price rallies are always welcomed by farmers as this will mean bigger milk checks. Late in 2009, cash and futures prices were climbing, changing the general attitude by giving the impression the worst was behind us and the only direction was up. Class III futures contracts were certainly exhibiting this with a number of months over $16.00/cwt. A bullish attitude returned to the market with Class III milk price estimates ranging upwards to $18.00/cwt. or more before the conclusion of 2010. World prices were strong and regional nonfat dry milk and whey increased, sparked by more interest shown from the export market.
Shortly after the beginning of the year, cash butter and Class III futures rallied, renewing hopes and anticipation of higher milk prices to come. However, world powder price was slipping after price reached a buyer threshold. It did not take long for butter price and milk futures prices to reflect the idea that recovery will take somewhat longer than anticipated.
Even an increasing cheese price could not turn the bearish tide of Class III futures. Butter price has fallen, eliminating the gains posted since the beginning of the year. Supply is sufficient to meet demand with additional product moving into storage.
Typically, this is a slower demand period of the year, and lower prices are generally seen relative to other times of the year. Now, I am using this in the broad sense of the term as there have been some years in which prices increased significantly early in the year.
In a previous article, I indicated that high cheese inventories would be an anchor on this market. This will continue to limit upside price potential until demand improves and pulls down inventory. There are some signs of an improving economy, but other reports and recalls continue to pop up indicating that economic recovery will take some time. Just last week the stock market was in danger of falling below 10,000 again.
Late last year, the USDA appropriated $60 million to purchase cheese for food programs along with another $290 million to be distributed to dairy farmers. The money has been distributed for farmers and to date. Of the $60 million appropriated to purchase cheese, $48.6 million has already been used. With most of this money already used and cheese purchased, the concern is that it has had little impact on cash prices.
Milk production remains lower than a year ago and is expected to remain that way most of this year. However, the bi-annual cattle inventory report may suggest otherwise. Even though the report showed we have 250,000 less cows than a year ago, the milk production has not fallen proportionately. Milk per cow continues to outpace year earlier levels according to the USDA’s milk production report.
The important number seen on this report is the amount of dairy replacement heifers (500 lb. and higher). There were 4.5 million replacements as of Jan. 1, an increase of 2% over a year ago. This may not sound like a significant amount until you compare it to previous years. In fact, this is the most replacement heifers available since 1986. Nearly all farmers that I have talked to indicate they will be freshening a lot of heifers in the next few months. Cull cow numbers may remain higher, but new blood will be injected into the herds with the potential for more milk per cow. Do not be surprised if milk production improves more quickly than anticipated.
Soybean meal futures have reached our target price of $275.00/ton for locking in feed coverage for this year. Use call options or forward contracts to lock up this part of your expenses.
Corn price should still have some downside price potential. Hold off on feed coverage until the market sets a floor or put buy stops above the market. Wait for a bounce in Class III milk futures before establishing put options in March through June contracts.
These options are insurance policies leaving the upside open to take advantage of a higher price if it were to develop. Those who did this on the last price rally are happy they did and have already protected an average of about 50 cents per cwt per contract.
Upcoming reports to watch for:
- Dairy products report on Feb. 2
- Fonterra auction on Feb. 2
- January class prices on Feb. 5
- World Supply and Demand report on Feb. 9
- Fluid milk sales report on Feb. 15
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.