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June 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.

Dairy: New Cheese Contract, Lackluster Price Outlook

Jun 28, 2010

By Robin Schmahl, AgDairy LLC


A successful launch of another futures contract took place last week with the CME Group’s cash-settled cheese contract.


Trading has been light, but I term it as successful due to trading interest and an open interest of 77 contracts -- unlike the International Skim Milk Powder deliverable contract which has yet to show any trading or open interest. 


The key to trading activity in dairy contracts is that they need to be cash-settled. Speculators and hedgers alike do not like to trade markets with limited open interest because it could result in having to give up quite a bit of price when the contracts needs to be offset rather than taking delivery.


We do not have to look back in history very far to see the evidence of this. Both the New York Coffee, Sugar and Cocoa Exchange (CSCE) and Chicago Mercantile Exchange (CME) launched milk futures for the first time in 1996. Not much trading activity took place due to the fact that it was new and also a deliverable contract. Those holding contracts many times found themselves having to give up a significant amount of money in order to buy or sell their way out of a contract when it neared delivery. This kept trading interest very limited.


Once these contracts were converted to cash-settled contracts without delivery, trading interest increased steadily and substantially. In time, only the CME offered milk contracts, and open interest has grown nicely. Butter went the same way with trading interest increasing after cash-settled contracts were offered.


The current cheese contract will follow suit with cheese manufacturers, buyers or speculators able to use this contract to protect price and purchase cheese through other channels without the worry over offsetting a contract when the time comes.


Some concern has been raised whether this new contract will reduce trading activity in the Class III market. The question is whether cheese manufacturers or buyers who have been using Class III contracts will switch to cheese futures, hence reducing volume and open interest in milk futures. Personally, I do not think it will have a noticeable impact. Yes, some may switch, but if anything I think it will bring more activity into the markets. Manufacturers who hesitated to use Class III contracts will likely use cheese futures to better manage their price risk. It will provide a better hedge correlation for them.


What concerns many is that cheese futures do not look very optimistic through the last month listed, which is June 2012. The highest cheese price listed out two years from now is $1.63. Of course, many things can and will happen during the next two years, but for now it is not indicating a significant upside price potential.


Price outlook is dampened by several factors. One factor is cow numbers. The latest Livestock Slaughter report released by the USDA indicates dairy cattle slaughter in May decreased from May 2009 as well as from the previous month. There were 209,000 dairy cows slaughtered during the month of May, a decrease of 26,000 head from April and 3,000 head less than a year earlier.


This indicates dairy farmers are buckling down and have likely eliminated most of the cows they wanted to get rid of though hard culling, leaving just their best cows. Yes, there will always be cows that will be culled, but sufficient heifers are available to take their place. Better genetics keep improving production per cow resulting in higher milk production.


USDA estimates milk per cow this year to increase 2% to 20,980 pounds. Its forecast for 2011 production per cow is estimated to increase another 1.8% to 21,355 pounds. Although this may sound bearish at the moment, an increase in domestic and world demand could absorb this readily, keeping milk prices from decreasing and in fact improving significantly. However, the economic situation is not as strong as was hoped it would be at this time.


My hedging focus is on feed right now. An improving weather forecast in the Midwest could bring grain prices lower, allowing for feed needs to be hedged. Another dip in prices should be taken advantage of with the use of call options or call option spreads. This is preferred as these strategies will allow you to take advantage of a lower price if one were to develop while at the same time protect against higher prices. It is critical that you not hedge a direct price to allow for flexibility.


Upcoming reports to watch for:


-          The Agricultural Prices report on June 29.

-          The Dairy Products report on July 1

-          California 4a/4b prices on July 1

-          The June Federal Order class prices on July 2.

-          Fonterra auction on July 6.

-          The World Agricultural Supply and Demand report on July 9

-          The California Class I price on July 9.



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


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.

Delaying Decisions Is Not Always a Good Thing

Jun 14, 2010

By Robin Schmahl, AgDairy LLC


Another bullet was dodged on the first of this month when the Chinese gave U.S. trade negotiators verbal assurance they would not enforce the deadline for dairy export certifications.


There had been some concern over what was to happen to dairy products that were en route to China prior to the June 1 deadline, but this concern has been put to rest. The Chinese indicated that if an exporter had a health certificate signed prior to May 31, it would be accepted no matter when it came to their ports. Shawna Morris, a trade policy specialist with the U.S. Dairy Export Council, stated that “the Chinese were not formerly changing the deadline; they don’t plan to enforce it at this time.”


Am I missing something here? It seems that if a deadline is set and it is not going to be changed, not enforcing it would be changing it, right? They are changing it from this date to another obscure date that no one knows about. This keeps it open for setting another date and enforcing it on a whim.


So, the USDA fortunately has more time to work out something with the Chinese before they implement the ban. Unfortunately, this dispute over health issues has been going on since 2007. Why has nothing been accomplished in three years? USDA seems to deal with things mainly when it becomes a crisis situation and then all hands are on deck.


As I understand it, other countries have taken care of the verbiage and requirements of the Chinese in order to keep trade open. However, it seems the USDA would rather just argue with the Chinese because U.S. dairy products are pasteurized, therefore, health issues regarding bovine TB and Brucellosis are not an issue. I think the issue is to take care of this and negotiate for the sake of our dairy farmers and preserving market share.


I applaud Cooperatives Working Together (CWT) for its effort in subsidizing cheese for export under its Export Assistance program. Since CWT reactivated this program on March 18, it has assisted in the exports of 36.1 million pounds of cheese, or approximately 903 truck loads.


This seems like a lot of cheese, but it’s not much considering the total cheese production in the country. This cheese has not yet all been shipped but is slated to be shipped from now through the end of the year. Nevertheless, it will keep that much out of inventory and hopefully support price somewhat. So, far this has had very little if any impact on price, but every little bit helps.


The current round of bidding taking place on the Herd Retirement program has not had any impact, and if pervious rounds are an indication, it will not have any.


Market prices will continue to move relative to supply and demand, or who is in the market buying or selling on any given day. This creates the volatility that we have become accustomed to. Unfortunately, this volatility and underlying price movement has been confined to a range for the first five months of the year, resulting in a Class III price average of $13.57/cwt.


It is not much to get excited about, other than it is quite a bit better than a year ago when it was $10.23/cwt. There were a few good opportunities to hedge milk prices at significantly higher prices during the later part of last year and the first few months of this year. Many, however, did not take advantage of these opportunities because the prevailing cry was, “It just has to go up”. I place some of the blame for this on the “seasonal” analysts.


There are a few dairy analysts out there who continue to hold to the cycle pattern and price seasonality, and base their recommendations accordingly. It did not make any difference what cow numbers, milk production, dairy farmer sentiment, economy, etc., were indicating. The cycle pattern indicated 2010 was to be a banner year with milk prices increasing dramatically after a year of very low prices just as it had in the past.


Seasonality indicated that milk prices were to jump by the middle to the later part of this year as buyers step up to the plate and purchase for end of the year demand. This is what everyone one wanted to hear and thus projections of $18.00/cwt. and higher milk prices were being forecast.


Underlying fundamentals, however, were not suggesting it was to be such a banner year, and those who could weigh the evidence with limited emotion could see a better year, but not a banner year. Those “great” price projections released via the printed and spoken word did a disservice to those in the trenches milking cows for a living. Thus, some good price opportunities were passed.


For these reasons, I am adamant at knowing costs and setting goals, then combining this with market fundamentals in order to protect equity. Whether this can be accomplished with straight options, option combinations, futures contracts or forward contracts, it needs to be done.


Upcoming reports:

-          July Class I price on June 18

-          The June Milk Production report on June 18.

-          The June Cold Storage report on June 22.

-          The June Livestock Slaughter report on June 25.

-          Commercial Disappearance on June 29.

-          The June Agricultural Price report on June 29.



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


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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