Fears Underpin the Dairy Market
Aug 31, 2012
Continued herd liquidation and heavy culling raise questions about supply. Will there be enough milk to go around?
There certainly are plentiful reports of dairy farmers exiting the business. Some farms have faced foreclosure while others have just thrown in the towel due to high feed prices and insufficient crops to replenish feed inventory. There are reports of feed being hauled great distances to fill bunkers, silos and haystacks, which certainly adds significantly to the price of that feed.
Producers certainly have to push the pencil very hard to see whether this added cost will be worth it. It will depend upon the long-term goals of each operation and the current financial status. It certainly is difficult when a year like this unfolds.
Many dairy farmers remember 1988 and the lower crop yields that resulted from it. However, a greater impact is being felt this year as grain stocks are very low. Grain prices are moving high enough to slow demand in order to have sufficient stocks through the year. Even if harvest turns out better than is expected and grain futures prices decrease, it may mean little for those purchasing feed. The increased cost of hauling that feed long distances will keep cash prices significantly higher than futures prices.
Milk handlers and manufacturers have been concerned for some time now that milk supply will tighten. With schools opening, Class I demand has pulled significant volumes of milk away from manufacturers. Generally, once the pipeline is filled and cows rebound in production, there is sufficient to go around.
However, this year will not be normal. Continued herd liquidation and heavy culling may keep milk production from increasing seasonally. The July “Livestock Slaughter” report showed slaughter up 32,000 head from a year ago.
This is significant. For the first seven months of this year, dairy cattle slaughter totaled 1.762 million head. This compares to 1.665 million head during the same period last year. An increase of 97,000 head is substantial and may be only an indication of what will be seen during the upcoming year. Milk production may remain stable, with the only increase seen coming from higher cheese yields due to better milk components. Steady milk production with seasonally increasing demand is the fear underpinning the market.
Despite increased cheese and butter prices spurring the desire to manufacture more product, manufacturers are unwilling to purchase spot loads of milk at a premium over class. They anticipate milk supply to improve enough resulting in the elimination of this premium.
Nonfat dry milk prices have increased for five consecutive weeks. Strong Class I demand has reduced the volume of milk moving to dryers. Supply has tightened and spot loads are increasingly difficult to find. Those who have extra inventory are holding onto it with confidence. Downside price risk is limited or non-existent.
The strategy of selling put options $1.00 under the market as I indicated in my last column has been working well. This continues to be a viable strategy to add premium to previously hedged milk increasing your hedged price on milk contracted through the end of the year. It is a strategy that needs to be monitored closely as it is speculating milk prices will remain higher. Current market fundamentals suggest these options will expire worthless allowing you to add 25-55 cents to your milk price.
- Dairy Products report on September 4
- Global Dairy Trade auction on September 4
- Dairy exports on September 11
- World Agricultural Supply and Demand report on September 12
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.