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December 2013 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 Milk Prices to Close Out the Year

Dec 23, 2013

Dairy farmers haven’t responded with higher milk production, but that could come with the next lactation.

The calendar is moving ever so close to the end of the year, but demand for cheese continues to hold up well. Block cheese prices was able to reach $2/lb., a level last seen in early November 2012. This strength has exceeded expectations for this time of year. December Class III futures contract is virtually priced and it looks like 2013 will have the second highest average Class III prices in history. Early 2014 is indicating a very promising beginning with January poised to exceed the December price.

Higher prices create a greater desire by dairy producers to increase milk production. Feed prices are lower with the best milk/feed ratio since October 2010. Culling has slowed with November dairy cattle slaughter totaling 249,000, down 20,000 head from last year and 28, 000 head from October. This is the lowest monthly slaughter since May. One would think milk production would show significant signs of improvement, but such is not the case. November milk production report showed milk production per cow in the U.S. only 2 lb. above last year.

Much of this slow growth has been attributed to the later summer hot weather and the significant impact it had on cows. Milk production potential is there, but cows will need to move into their next lactation before full production can again be achieved. There are feed quality issues in some areas, but this is being overcome through proper ration balancing. USDA feels there is potential for higher milk production with projected milk output to reach 204.9 billion lbs in 2014.

Higher world dairy prices and competitive U.S. prices certainly have been good for exports. There is concern over the desire of some to see supply management implemented. This could result is the loss of some export business. Other countries want to have a reliable source of dairy products and with possibility of interrupted supply business could suffer. One thing for sure is that we do not want to lose market share that has taken time to build up.

Information is beginning to trickle that current high prices are beginning to uncover some buyer resistance. However, good demand is expected to support prices and keep them from falling out of bed. Although milk production remains higher than last year, current production is improving more slowly.

Rather than a significant amount of excess moving to the vat over the holidays, dryers will be busy taking in and processing as much milk as possible to hopefully catch up on demand. This will reduce the amount moving to manufacturing and may still require price premium over class in order to obtain it.

Cheese plants have been reducing or eliminating the amount of nonfat dry milk added to the vat to increase cheese yields. High nonfat dry milk prices are making the use of powder cost prohibitive and plants are deciding to take a lower yield. This could help in the overall supply of nonfat dry milk, but certainly will not have a significant impact. Strong domestic and international demand keeps prices high.

Now is the time to step in and hedge your milk if you have not done so. Those who are hedged and have been holding and paying margin need to continue to hold those positions. Fence strategies are preferred with purchasing puts and selling calls providing some flexibility.

This is an interesting and critical time of the year. Emotions are running high and there are opinions on both sides. Each producer needs to keep things in perspective. Do not guess on milk prices, but protect milk prices and revenue.


Upcoming:

- Agricultural Price report on Dec. 30
- New Year’s Day: Markets not open
- Federal Order class prices on Jan. 2
- Dairy Product Production report on Jan. 3
- World Agricultural Supply and Demand report on Jan. 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.

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.

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. 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.


 

What’s Been Driving Cheese Prices?

Dec 09, 2013

Good demand is a correct assessment, but it’s not the only reason.

It seems as if the market has caught the holiday sprit, and volatility is the result. Block cheese prices moved to the highest level since Nov. 8, 2012, giving the impression that current milk and cheese supplies are tighter than a year ago. If December Class III milk futures close at (or near) the current level, then 2013 will have the second highest yearly average in history. Along with this, we are ending the year with the best milk/feed ratio since October 2010.

This brings us to the question, "What caused the recent significant increase in cheese prices?" The first thing that comes to mind is that there is good demand, which is a correct assessment but not the only reason. Domestic demand is good with seasonal demand strong. Export demand has been exceptional compared to last year.

In the third quarter, U.S. butterfat exports were up 283% from a year ago, with nearly 16% of butter production shipped in the July-September period. Whole milk powder exports were up 235% in the third quarter. On a value basis, exports totaled $593 million in September, up 48% from the previous year. Year-to-date export values reached $4.92 billion, 26% ahead of last year. U.S. exports have accounted for 15.4% of the total milk produced in 2013. Whey protein exports have reached 47% of total production, with 45% of the total NDM/SMP produced being exported.

October exports of cheese and curd were slightly higher than the pace set in September, according to Foreign Agricultural Service (FAS). Cheese exports were up 41.4% over last year, with totals reaching 27,074 metric tons (mt). Cheese exports for the first 10 months of this year are 16.5% above the same period of time last year. Whey exports reached 44,028 mt, up 3.6%. Year-to-date exports are up 3.6% over last year. October exports of butter are up 145.3% over last year totaling 10,512 mt, according to FAS numbers. Exports are up 72.0% so far this year, compared to the same period last year. Nonfat dry milk exports increased 56.2% to 51,702 mt in October and up 18.5% for the year.

October’s "Cold Storage" report showed a decline in American cheese stocks of 31.8 million pounds, with stocks totaling 629.2 million pounds. Supply is still 3% above last year. Swiss cheese stocks declined 2.3 million pounds to 27.7 million pounds. This is down 8% from last year. Other cheese stocks declined 12.4 million pounds, totaling 367.3 million pounds, up 4% from last year. This put total cheese stocks at 1.024 billion pounds, down 47.0 million pounds, but still 3% higher than last year. October butter stocks declined substantially with inventory at 173.8 million pounds. This was down 59.2 million pounds from last month, but up 20% from last year.

Taking into account good domestic and international demand, one has to wonder why inventory remains above year-earlier levels. The current rate of decline is similar to last year, but inventory was at a higher level when the seasonal decline began. Much of the recent increase in cheese prices has been the result of immediate orders that needed to be filled as retail outlets frantically stocked shelves for year-end demand. Buyers had to come to the spot market to purchase cheese at whatever price they could get it. I have seen this happen in the past during this time of year.

A price void could be developing under this market and, once last-minute buying is complete, a swift price decline could unfold. If you have not already done so, now is the time to initiate a hedging strategy, using either a fence strategy consisting of purchasing puts and selling calls or just put options to protect current milk prices for either Class III or Class IV, depending on your location and utilization.

Upcoming reports:

- World Agricultural Supply and Demand report on December 10
- Global Dairy Trade auction on December 17
- January Federal Order Class I price on December 18
- November Monthly Milk Production report on December 19
- November Livestock Slaughter report on December 19
- November Cold Storage report on December 23

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. 

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