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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.

Traders Focus on Weather as Much as CME Prices

Jul 09, 2012

Concerns grow over grain crops, milk prices, farmer impact and consumer demand.

All eyes are on the weather and grain markets. Farmers and the industry were excited over a nearly ideal spring when early planting possibly opportunities sparked talks of potential phenomenal yields.

Those hopes are being currently dashed on a weekly and even daily basis in many areas. Weekly deterioration of the crop continues to lower the potential yield and raise price. Early planting means early pollination, which came at the wrong time this year. Pollination takes place over a period of weeks in the main corn growing areas of the Midwest, with these weeks right smack in the hot and dry period.

The dairy and livestock industry is watching this with growing concern. Feed prices are going to be high, making it more expensive to feed those animals. Culling already has increased, primarily in the livestock industry. It will begin in earnest in the dairy industry shortly. Increasing milk futures gave hope to dairy producers for better milk prices and an improvement in profitability. It does not appear, however, that the milk/feed ratio will be able to improve because of the rising feed costs.

I have been hearing repeatedly that the milk price has to go significantly higher due to grain prices increasing. That is the likely assessment and is historically accurate. Higher feed prices will impact milk production, tightening milk supply and increasing price.

The interesting thing this year is that world prices are somewhat depressed. There was much excitement over a 14% increase in the Global Dairy Trade weighted index during the early June event, but the weighted index has declined over the past two sessions, erasing nearly half of its gains. Milk production in other countries has been strong and remains strong compared to the previous year. Milk production in Europe is declining seasonally. Production in Europe has been very similar to the U.S., with current production running 2% above last year and currently in a seasonal decline.

Europe’s butter stocks are sufficient for needs, with excess volumes clearing to their PSA program. As of the end of June, 99,574 metric tons have moved to PSA storage. Last year, over 100,000 metric tons cleared before it began to be removed. This program will remain open until Aug. 15 before it will be closed and product can begin to be removed.

New Zealand production finished the year nearly 9% higher than the previous year, with the industry optimistic about the upcoming year. Australian milk production is currently up 2%. These countries utilize mostly grazing and are not as susceptible to high grain prices. However, that does not mean they will not be affected. Lower milk production in the U.S. would mean more demand for foreign dairy products, which would possibly tighten their supplies.

The market may be doing a balancing act in the near term as grain prices would eventually mean higher milk prices, but higher milk prices would decrease demand. According the USDA’s “Dairy Market News” publication, export demand remains good, but there is growing concern that increasing price levels on the CME spot market may decrease export demand. Cooperatives Working Together continues to accept requests for export assistance for cheese, which has helped exports significantly.

It looks like it will be a very difficult year, and one that will have great impact on farmers. However, the impact will also be felt by consumers across the nation as they face significantly higher food prices. This will result in consumers changing their purchasing habits, eliminating some convenience or luxury foods by turning more to staples. Disposable income will then decline, which in turn have an impact on the economy as a whole. Prices will then decline to stimulate demand, and the cycle will continue. Yes, we lived through the drought of 1988, but we did not have ethanol production and we had a corn carryover of more than 4.259 billion bushels. This year is completely different and will be a challenge

Upcoming reports:

- World Agricultural Supply and Demand report on July 11
- Fonterra auction on July 17
- June Milk Production report on July 19
- June Cold Storage report on July 20
- Bi-annual cattle inventory report on July 20
- June Livestock Slaughter report on July 20

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.

 

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