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February 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.

Troubling Signs Ahead as Milk Output Continues to Grow

Feb 15, 2013

Dairies will continue to push milk production, despite high feed prices, which may result in a very low milk/feed ratio.

February has provided some hope for milk prices with cheese and butter prices increasing since the beginning of the month.

The magnitude of the price strength was a bit unexpected. Fundamentals have not been much different from January, but, nevertheless, prices have improved. This has kept Class III milk from falling below $17.00, where it was earlier projected.

Price strength does not seem to have stemmed from reduced milk production or tighter supply, but more from the fact that buyers left the sideline. As prices were weakening, buyers held back waiting for lower prices, and were only purchasing hand-to-mouth. Once prices seemed to have set a bottom and began rising, buyers came in to purchase more aggressively in the attempt to beat higher prices.

This generally pushes prices higher as buyers try to outbid each other. Sometimes this unfolds very aggressively, primarily in a tight market. It has been unfolding slowly this year but, nevertheless, taking place. Extra cheese is being purchased to rebuild aging programs with some purchased for anticipated demand.

Milk production and available supply were stronger throughout 2012 than had been expected. High feed prices sent many cows to slaughter, but they were quickly replaced in the nation’s dairy herd. USDA raised its expectation for milk production this year to 201.0 billion pounds, a new record. Even with this production expectation, USDA left expected milk prices almost steady on the latest World Agricultural Supply and Demand report.

This rise in production would be a significantly slower increase than the past few years, but still an increase. The numbers of dairy cows in the nation’s herd is forecast to decline 0.7% this year, totaling 9,170,000 head. Production per cow is estimated to rise 1.0% to 21,920 pounds. USDA thinks dairy farmers will continue to push milk production, despite high feed prices, which may result in a very low milk/feed ratio.

If the current expected averages for the All-Milk price, corn price, soybean price and the recent alfalfa hay price come to fruition this year, the average milk/feed ratio would be 1.40, a record-low ratio. This is certainly not a profitable outlook. I am not making a prediction of this, but just putting current prices and projections in perspective. I do not believe the ratio will be this low.

If, however, it does fall to that level, a second round of heavy culling will be triggered. Increased culling this time may have a greater effect on cow numbers as farmers may not be as willing to fill those stalls with a replacement, especially if dry weather continues and impacts yields. Dairy farmers may not be as willing to hold on and pay the high feed price. If milk supply tightens, resulting in significantly higher milk prices and improving profitability, then this will not be the case, as farmers will respond and keep production strong. This is the cycle that always has been and always will be.

Upcoming reports:

- Global Dairy Trade auction on Feb. 19
- January Milk Production report on Feb. 20
- January Livestock Slaughter report on Feb. 21
- Advanced Federal Order Class I price on Feb. 21
- January Cold Storage report on Feb. 22
- February Federal Order class prices on Feb. 27
- Agricultural Prices report on Feb. 28
- Dairy Products report on March 4

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. 

Is Heavy Culling Reducing Cow Numbers or Improving Herds?

Feb 04, 2013

Despite high feed prices and significant culling, dairy farms continue to crank out the milk.

A ray of hope pierced through the weakness last week as barrel cheese prices posted the first increase since the beginning of the year. Relentless cash price weakness resulted in the decline in Class III futures, eliminating nearly $1.25 per cwt. in closer months before selling subsided, resulting in a price bounce. A trending market always has a retracement, and this is it. It is unclear whether this will hold or if it is the proverbial "dead cat bounce" in a down-trending market.

There is yet to be a shortage of milk supply, which would require buyers to scramble for available product. And current market fundamentals do not suggest this will take place in the near future. Milk production in 2012 was up 2.1% over 2011, despite high feed prices and significant culling. Dairy farms continue to crank out the milk.

Dairy cattle slaughter in December totaled 259,000 head, down 10,000 from November and down 3,000 head from the previous year. This is the lowest December slaughter since 2009. Higher milk prices caused dairy farmers to hold back, hoping to capture as much of the better milk prices as possible. However, overall dairy cattle slaughter for 2012 outpaced 2011 by 6.4%, totaling 3,101,000 head.

Despite the heavy culling seen last year, dairy cattle inventory on Jan. 1 totaled 9.22 million head, down only 10,000 head from a year ago, according to the USDA’s "Bi-annual Cattle Inventory" report released last week. Replacement heifers totaled 4.55 million head, down 2% from last year. However, this is the third highest number of replacement heifers over the past 20 years, with the percentage of heifers to milk cows at 49.4% and the fourth highest percentage over the same period. It appears that a large part of the higher slaughter numbers each month may have been mainly turnover of the herd. Cows that were sold for one reason or the other were quickly replaced. Another generation with better genetics is improving milk production rather than retracting it.

We may be on the verge of another round of increased culling and farm liquidations. Milk prices have been and will be declining for the next few months unless milk supply and/or cheese supply tightens. The All-Milk price for January was $20.00, down 90 cents from December.

While milk prices and futures prices have been declining, feed prices have been steady to higher. The latest USDA "Agricultural Prices" report showed the average corn price in January increasing 11 cents to $6.98 per bu. Soybean prices declined 20 cents per bu., still remaining high at $14.10, while the alfalfa hay price remained unchanged at $217.00 per ton. This put the milk/feed ratio at 1.58, down 8 points from December. This may be magnified over the next few months.

The nation’s drought has changed very little so far this winter. With only 6 weeks of winter remaining, concern is developing over the potential for adequate moisture for optimum yields this year. Even though corn futures may not need to increase in the intent to purchase more acres, soybean price may increase in order to make sure of adequate supply. If we add a potential yield reduction in wheat due to dry conditions in the Plains, spillover support could run through the grain complex. This could increase grain prices substantially. Time is running out for trend-line yields, which could be devastating to both feed and food prices.

My recommendation is to purchase call option, call option spreads, or futures contracts to cover feed needs for the rest of the year, if you have not already followed my earlier advice. Do this soon, as any price retracement will be minimal. This will be critical for the dairy operation this year.

Upcoming reports:

- Global Dairy Trade auction on Feb. 5
- World Agricultural Supply and Demand report on Feb. 8
- Dairy exports report on Feb. 8

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. 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.

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