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October 2010 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.

High Feed Prices Mean High Milk Prices – Maybe

Oct 18, 2010

Milk prices do not have to go up because feed prices are higher. We should not be complacent that high feed prices will automatically increase milk prices next year.  

 
Over the past few months, one statement had been prevalent among dairy farmers and that is: “With corn price going higher, milk price just has to go higher.”
 
This certainly is a valid statement and one that has historical basis. Higher feed prices will result in heavier culling and changes in feed rations, which can have a definite impact on farm output. Theoretically and historically, this has been true in many cases. However, there have been some exceptions to the rule as there always are when dealing with an uncontrolled environment. Let’s take a closer look to see what has happened in the past and what we may be looking at in the future.
 
First, a low milk price does not automatically mean a low milk/feed ratio. In 2000, the average Class III milk price was $9.78/cwt., but the average milk/feed ratio was 3.06 due to low grain prices. In 2007 and 2008, milk prices reached record highs while the milk/feed ratio dropped to an average of 2.80 and 2.01, respectively. In essence, we were trading dollars for dollars if all feed was purchased hand-to-mouth, but it was an indication that higher feed prices resulted in higher milk prices. Last year, milk prices fell further than grain prices, resulting in an average milk/feed ratio of 1.78, the lowest since I have records back to 1985.
 
Another aspect that helped propel milk prices to new highs was solid demand from a strong economy. However, we all know what has happened in the economy over the past two years, and it has had a dramatic impact on demand. Milk prices would not have been as low in 2009 had it not been for a struggling economy and high unemployment that reduced disposable income.
 
Great strides have been made in other areas such as cow comfort, production per cow, sexed semen, feed efficiency, etc., which have resulted in a better income over feed costs on many operations. Forward contracting feed when there are opportunities, or those who grow much of their own feed, improve income over feed costs significantly.
 
So, do high corn prices automatically mean high milk prices? Historically there have been many years of higher milk prices when corn prices were higher. However, the partnership of higher corn prices and higher milk prices has been shared about equally with times of higher milk prices and lower corn prices or higher corn prices and lower milk prices.
 
The bottom line is that it all comes down to supply and demand. High feed prices can definitely have an effect on supply, resulting in high milk prices, but slower demand will cause an increase in supply, which will need to clear the market. Right now, we have a large amount of cheese in storage that will need to be reckoned with at some point. Demand will need to increase or milk supply decrease to keep from adding more to these storage levels next year.
 
Milk prices do not have to go up because feed prices are higher. Many times they will, but various other factors need to be considered. We should not be complacent that the high feed prices will automatically increase milk prices next year.  
 
The decrease in block cheese prices last week ended a streak of steady to higher prices that began June 29, ultimately leading to a rally of 37.25 cents. Buyer demand may be satisfied for the time being, and a retracement in price could be experienced in the near-term.
 
My hedge recommendation is to implement fence positions for the first half of 2011. Purchase $14.00 puts and sell $16.00 calls for 40-50 cents on no more than 50% of production. This is a marginable position that will establish a floor at $14.00 and a ceiling at $16.00, minus the initial cost. Look for opportunities to hedge feed prices if the market retraces, or purchase call options that will protect against increasing prices while leaving the bottom open to purchase at lower prices if markets fall back.
 
 
Upcoming reports:
 
-          September Milk Production report on October 19
-          Fonterra auction on October 19
-          November Class I price on October 22
-          September Livestock Slaughter report on October 22
-          September Cold Storage report on October 22
-          Consumer Confidence on October 26
-          Commercial disappearance on October 26
-          October Agricultural Prices report on October 29
 
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.

Procrastination May Cost Us Dearly

Oct 04, 2010

First China, then Russia, said “no” to U.S. dairy imports. We need to call on USDA and other officials to take care of what needs to be taken care of -- or our export markets may be limited.

 
Well, here we go again. Last week, Russia announced a ban on dairy products from all countries -- the U.S. being one of them -- that have not met its demand to establish a list of plants meeting Russian requirements. This was not announced on a whim but has been an ongoing issue with Russia for nearly two years. The U.S. has not had a bilateral export certificate during this time, and now Russia is enforcing it.
 
This may not have much impact on exports as a whole. January-July exports to Russia only totaled 3.4 million pounds of butterfat and 2.4 million pounds of nonfat dry milk. Russian imports of dairy products from the U.S. have been very erratic over the years. In 2008, it imported 33.9 million pounds of butterfat while in 2009 it imported 1.9 million pounds.
 
So, even though Russia will not import dairy products from the U.S. and other countries that have not met its requirements, it will still import dairy products and get them from countries that have met its requirements. The most likely country will be the European Union. As demand increases for European dairy products, Europe will, in turn, import to satisfy domestic or export demand, with the U.S. being the country the EU will most likely turn to. It is possible the same amount of business will be done, only in a round-about way.
 
Why should we not be complacent about this? Business is business, and any loss of market share is a loss to our dairy industry. A little here and a little there can eventually add up to be a significant amount. The U.S. is competing in a global market, and it is a different playing field. In order to be competitive, we need to adapt to that playing field or we will eventually lose. We need to call on USDA and other officials to take care of what needs to be taken care of or our exports markets may be limited. We certainly do not want to see more money being taken out of farmers’ pockets for the purpose of subsidizing exports to move our products.
 
This sounds familiar. On June 1, a deadline was reached requiring certain verbiage and requirements needed to be implemented to obtain health certificates for exporting dairy products to China. As a result, China was going to ban the importation of dairy products for the U.S. However, this has been put on the back burner. China had not enforced the deadline giving USDA and the Chinese more time to work this out.
 
However, despite some international issues and large domestic cheese supply, milk prices remain well-supported. September class prices were announced last week, showing another nice increase. The Class II price was $17.60, an increase of 62 cents from August; Class III was $16.26, up $1.08; and Class IV was $16.76, up $1.15. These are the highest prices since the third quarter of 2008.
 
Cash prices on the daily spot market at the CME Group remain steady to higher. The market is balanced with buyers purchasing what little is being offered at current price levels. Higher prices have not yet turned consumers away, resulting in some backing up of product. This may eventually happen once end of the year and holiday demand is satisfied, but for now we can enjoy higher prices.
 
Class III milk futures are not so optimistic, maintaining a significant discount to the underlying cash in 2011 contracts. Increasing milk production and improving components will increase dairy product availability unless demand will rise to offset the increase. Seasonally, demand will slow early in the year, and futures contracts are anticipating this.
 
Feed price protection is the emphasis now. The quarterly stocks report released Sept. 30 was bearish for corn and neutral for soybeans. As a result, corn’s price has fallen to levels that demand action. December corn falling due to huge fund liquidation is providing the opportunity to establish feed price protection.
 
Purchase call options in December no more than two strike prices from the current futures price. Purchase call spreads for subsequent months for a net cost of 20 cents for contracts through July. Do the same for soybean meal with December futures price below $290 per ton.
 
Upcoming reports:
 
-          Fonterra auction on Oct. 5
-          World Agricultural Supply and Demand report on Oct. 8
-          California Class I price on Oct. 8
-          September milk production report on Oct. 19
-          Fonterra auction on Oct. 19
 
 
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 its 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.
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