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January 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.

Will Hay Be the Next Gold?

Jan 21, 2013

As the milk supply grows to meet demand, concern over adequate hay stocks heightens.

It certainly has been difficult over the past year in terms of profitability. A year ago, feed prices were somewhat lower but so were milk prices. The March corn futures contract was trading near $6.35 at this time last year while March soybean meal was near $325.00 per ton. The January Class III price was $17.05 with a Class IV price of $16.56 and a milk/feed ratio of 1.72.

Currently, March corn futures are nearly $1.00 higher with soybean meal futures nearly $100.00 per ton higher. The January Class III price is expected to be $18.14 per cwt. and Class IV, $17.59. The January milk/feed ratio is yet unknown but is expected to be around 1.65. So, we have gone a whole year with virtually no change in the correlation of milk prices to feed prices despite significant volatility.

There was much anticipation for a tight milk supply as high levels of slaughter were taking place as a result in high feed prices last year. Dairy operations were going out of business with overall cow numbers declining. However, declining cow numbers were short-lived and began slowly increasing in recent months. Along with this, production per cow also began to improve, resulting in sufficient amounts of milk available for demand. In fact, the Midwest region increased production significantly. Milk receipts over the past two months have been higher than usual for this time of year. Milk was, and still is, being offered to manufacturers at discounts in order to entice buyers. Some of the other regions of the country are not quite as flush with milk but still have sufficient supply to meet demand.

Dairy producers continue to find ways to improve milk production as well as manage costs. This does not mean there has been much profit, but yet it seems there is enough incentive to continue to produce and improve, much like any other business would do.

It is difficult to predict what this year holds for us. Weather will be the deciding factor for many things and businesses. We could see grain stocks increase significantly if we have ideal weather pushing yields above the trend line. However, even ideal weather may not have great impact on hay supply.

National Agricultural Statistics Service (NASS) reported on its 2012 "Crop Production Summary" that alfalfa and alfalfa hay mixture production was at the lowest level since 1953. Hay production was estimated at 52.0 million tons, down 20% from 2011. The drought had a significant impact, with harvested acres the lowest since 1948. USDA indicated on its latest "Quarterly Grain Stocks" report that hay stocks on Dec. 1 totaled 76.5 million tons, down 16% from last year and the lowest hay stocks since 1957.

Reduced hay production is becoming a greater concern as more acres are being turned into row-crop production. Dairy farms that cease milking cows many times will either move to grain production themselves or will rent the land to someone who may produce grain on those acres rather than more labor intensive hay production. High grain prices will increase the desire to plant row crops.

Increasing land rents do not provide incentive for hay production either. This may push hay prices up even further as supply tightens. This can be a great opportunity as a cash crop for those who desire to meet that market, but generally row crops seem to be preferred. What is ironic is that even though hay stocks have tightened substantially, hay exports have increased significantly. According to USDA’s Foreign Agricultural Service, exports of alfalfa hay for the first 11 months of 2012 totaled 1.749 million tons, up 10% from the previous year. Exports of other hay totaled 1.947 million tons, up 19% last year. This is expected to increase as world wide demand for hay improves.

Upcoming reports:

- December Cold Storage report on Jan. 22
- December Milk Production report on Jan. 23
- December Livestock Slaughter report on Jan. 24
- January Federal Order class prices on Jan. 30
- Agricultural Prices report on Jan. 31
- Bi-Annual Cattle Inventory report on Feb. 1

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.

The ‘More Milk-Less Milk’ Conundrum

Jan 07, 2013

Despite high feed prices, producers’ desire to push milk production remains alive and well. That could quash the effectiveness of the Dairy Security Act's supply management provision.

Now that the holidays are behind us, the market seems to have settled down to usual, for the time being. Cash business is being done without much fanfare, giving the impression buyers and sellers may be comfortable at present price levels.

The much anticipated tightness in the market that was predicted during the summer did not materialize. There were numerous farms that went out of business, sending high numbers of cattle to slaughter. However, younger animals took their place, and balanced rations kept milk production strong. Farmers found ways to reduce feed costs and increase production during a difficult year.

One thing I had anticipated this year was that dairy producers were going to utilize more and different feeds in balancing rations, and that is exactly what many have done. Producers have discovered feed stuffs that actually have lowered costs and improved milk production. The prolonged period of the low milk/feed ratio, which has been unprecedented, forced dairy producers to look for changes. The December ratio was 1.65, the lowest it has been since September, ending the year with an average milk/feed ratio for 2012 of 1.52 -- the lowest in history. This has stimulated greater culling. But the fact that milk production has been growing and feed prices have been slowly declining could keep the desire to push milk production alive and well.

Congress extended the 2008 farm bill, leaving business as usual. A new farm bill, once adopted, may contain the Dairy Security Act. However, the desire of dairy producers to increase milk production when milk price is higher could render the Dairy Security Act (the proposal for managing milk production to keep milk prices supported along with a margin insurance) somewhat useless.

Those who want to have the ability to improve milk production as they see fit are unlikely to utilize this voluntary program. I have yet to talk to a dairy farmer who is interested in taking part in this program if it is included in the farm bill. Rough surveys have been taken which indicate about 40% of the nation’s dairy farmers are interested in taking part of this voluntary program if it is included in the farm bill.

I think this percentage may be a bit high. After all, if only a minor percentage of farms take part in this, it may end up like the voluntary CWT Herd Retirement Program, which had little, if any, impact on overall milk prices during the time it was active. In fact, the first five years of the program resulted in U.S. cow numbers increasing despite the Herd Retirement Program. And we all know what happened in 2009 when milk prices fell to 21-year lows. That triggered cow numbers to decline as culling picked up aggressively.

A vicious cycle could result if those who signed up for margin insurance and milk supply management would be required to reduce milk output, because producers who did not sign up for the voluntary program would push milk production to take advantage of the resulting higher milk prices. This could create greater supply and, once again, lower prices, resulting in the repeat of those taking part in the supply management provision to be required to reduce production again, and on and on.

One thing that has not been lacking the past two years is periods of high milk prices. Record high All-Milk prices were established in both 2011 and 2012. The problem is that high feed prices were also taking place, leaving us essentially trading dollars for dollars. Margin insurance could reduce some of this risk, as well as other tools such as futures and option strategies.

One can only hope that world demand for dairy products continues to grow. This growth will be essential for better milk prices. Our purpose is to continue to produce high quality dairy products that domestic consumers and the world will want. If the U.S. cannot compete internationally, then whatever domestic programs are implemented will have limitations as well as only short-term effect on milk prices.

I recommend stepping up and protecting feed prices for the year. The decline of grain prices seen over the past month is the gift we have been waiting for. If you have already purchased call options or call option spreads, roll those options down to a lower strike price. There is significant upside price risk if the weather pattern does not change by this spring.

Upcoming reports:

- World Agricultural Supply and Demand report on Jan. 11
- Annual Crop Production report on Jan. 11
- Quarterly grain stocks report on Jan. 11
- Dairy Export report on Jan. 11
- Global Dairy Trade auction Jan. 16
- Advanced Class I price for February on Jan. 16
- December Cold Storage report on Jan. 22
- December Milk Production report on Jan. 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.
 

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