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December 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 to Eventually Impact Production

Dec 27, 2010

 

We are drawing to the end of another year that has been both exciting and frustrating.
 
Milk prices were able to move to a level that was not anticipated earlier in the year, with Class III prices reaching above $16.00/cwt. for September and October, while Classes I, II and IV were able to move above $17.00. This certainly was a welcomed sight, considering continued strong milk production and growing cheese stocks.
 
Exports increased significantly versus a year ago, helping to keep product moving. Domestic demand was better than last year as well, but, even with these improvements, stocks of cheese increased through most of the year. August and November were the only months to show a decrease in cheese stocks, according to USDA’s “Cold Storage” reports.
 
December’s figures will not be released until January, but it looks like December will also show a decrease. Normally, stocks will increase during the first half of the year and decrease the second half. So, despite some good movement domestically and internationally, stocks continued to grow. We can take comfort in the fact that milk prices were as high as they were despite this. This give us hope that next year may be better if demand will increase further.
 
Next year will be a real challenge as far as feed prices are concerned. Weather patterns in other parts of the world have underpinned the grain markets as more concern over production is developing as time moves forward. The dryness in Argentina is at the forefront as it is the second-largest corn producing country. Corn is moving through pollination stage and continued dryness will prompt forecasters to reduce production.
 
This may increase export potential for the U.S., which is already facing tight carryover, according to projections. Any glitch in weather next spring or not enough acres being planted could cause the market to explode. The job of higher prices is to find a level at which demand will be reduced, and that is what the market will do. The debate over food, feed and fuel will burn brightly again.
 
Declining milk prices, as we have seen since the peak in October and the outlook presented by Class III futures, will cause many to cull more heavily, which may result in reduced milk production and a tighter market. This may take a few months, but nevertheless will happen.
 
USDA released its “Livestock Slaughter” report last week, which indicated culling is increasing. Dairy cattle slaughter in November totaled 241,000 head, 10,000 more than October and 32,000 more than a year earlier. This was the highest slaughter for the month of November since 1997. However, the pace of slaughter this year still lags the pace in 2009 by 42,000 head.
 
The U.S. dairy herd totaled 9.121 million head in November, 30,000 greater than a year ago, according to the November milk production report. It may take a few months to get cow numbers below year earlier levels again.
 
Butter will be the wild card in 2011 as the current price is not expected to decrease very much. Some believe prices will retrace somewhat early next year, but it is unlikely they will decline very far. November cold storage of butter showed stocks dropped 38.8 million pounds from October to 70.0 million pounds, and are 51% less than a year ago. This level is similar to November stocks in both 2004 and 2005.
 
It is interesting to note that butter stocks in 2003 were high, similar to what they were in 2009. They then fell the following year, similar to what they have in 2010. However, in 2006, they rebounded again. The question is whether this pattern will hold true again over the next year or two.  
 
There is no doubt 2011 will be a challenging year. Corn and soybean prices will be high unless end users seek alternatives, slowing demand significantly.
 
Any dip in grain prices as a result of fund liquidation and/or a price retracement needs to have call options or call option spreads initiated. This will protect further price increases while at the same time leaving the bottom open in order to purchase the physical at a lower price. Price protection will be critical in 2011.
 
Upcoming reports:
 
-          December class price on December 30
-          Agricultural Price report on December 30
-          Dairy Products report on January 3
-          California 4b price on January 3
-          Fonterra auction on January 4
-          Fluid milk sales on January 7
-          California Class I price on January 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. 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.
 

Potential Milk Price Rally in Doubt

Dec 13, 2010

The milk price trend doesn't look bullish. The recent cheese price rally has come and gone. And, although some think high grain prices will translate into high milk prices, I don't think that dairy upswing is likely to happen. 

 
Cheese buyers have become less aggressive as most cheese for the holidays has been shipped. Higher mailbox milk prices were a welcomed sight over the past few months. Increasing cheese prices gave the impression that early 2011 months may not as bad as Class III futures were anticipating.
 
However, the recent rally in cheese prices has come and gone, with futures trending lower. The January Class III contract is perilously close to breaking below $13.00. If cheese prices decline further, January could post the lowest Class III milk price since April.
 
There has been much speculation over potential milk prices for the upcoming year due to strong grain prices. The idea of high grain prices translating into high milk prices is prevalent. I have dealt with this subject in a previous column showing that this is not always the case.
 
If there is a rally in milk prices due to an extended period of high feed prices, it would be delayed since it usually takes a few months before the effect is felt. We are currently experiencing one of those times when grain prices are high. Corn prices have been above $4.00/bu. since the end of July with price above $5.00/bu. since Oct. 8 in the December futures contract.
 
The block cheese price was $1.60 1/4 at the end of July and moved up to $1.77 by Oct. 6 before falling to $1.40 on Nov. 11. The price last Friday fell to $1.39, the lowest it has been since June 15. This certainly is not showing much promise for higher milk prices due to higher grain prices. My expectation is feed prices will eventually have an impact, but the timing of this is difficult to predict.
 
Many analysts speculate that corn and soybean prices may move significantly higher as the marketing year progresses due to strong demand for food, feed and fuel. Export sales have been doing well, especially for soybeans. Sales for this marketing year are already at 78.2% of USDA’s estimate of exports. This is 20.7% ahead of the 5-year average.
 
Corn sales have not been as aggressive as soybeans, but have been steady with 47.5 % of USDA’s estimate already sold. There was concern over the ending of ethanol subsidies at the end of this month, but Congress has extended the 45? per gallon subsidy for another year. (How is that for sweeping in under the carpet for awhile instead of making a decision?) The current import tariff of 54? per gallon will also remain in place. On top of this, they will resurrect and extend the $1.00/gln. subsidy for biodiesel, which was dropped last year.
 
USDA made little change to its expectation for 2011 milk prices on the World Agricultural Supply and Demand report released last Friday. The Class III milk price for next year is now expected to range from $14.45-$15.25/cwt., only a slight change from the previous month. Class III price is expected to average $14.40/cwt. this year. The all-milk price is expected to range from $15.90-$16.70/cwt., a slight decrease from the November report, with the average price for this year estimated at $16.30/cwt. Overall production next year was only reduced 100 million pounds to 195.5 billion pounds. This would be 2.7 billion pounds more than 2010.
 
Hedging opportunities are limited due to the low Class III prices in the first half of the year. If protection needs to be done to protect against prices below current level, I still recommend fence positions. Purchase a put and sell a call at the highest strike price possible while keeping cost reasonable.
 
It is unlikely milk price will rally much during the first half of the year. Those who initiated fence positions earlier per my recommendations have a significantly better price protected. Be more conservative for the second half of the year. Fence positions are still preferred, but keep hedging volume limited.
 
Upcoming reports:
 
-          Fonterra Auction on Dec. 15
-          January Class I price on Dec. 17
-          November Milk Production report on Dec. 17
-          November Cold Storage report on Dec. 22
-          No trading on Dec. 24
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