Market Watch Diary: Bulls and bears

September 7, 2010 05:49 AM
 

DT 042 D10149

Bonus content

National Agricultural Statistics Service's cattle report
It’s fall harvesttime—an appro-priate point at which to assess the bulls and bears in the marketplace in an effort to get properly positioned for the year ahead. At this writing (just ahead of Labor Day), projections are for above-average prices next year, but can we get there?

The bull-market indicators make a compelling case.

At the top of the list is the tight butterfat market. Butter stocks relative to consumption are at their lowest since 2001; stocks on hand at the end of July were what we normally have at the end of September.

In addition, butterfat exports are stronger this year and should remain so into early 2011, at least, thanks to CWT’s export assistance program. Subsidized shipments should average at least 5 to 6 million pounds per month.

A rising tide lifts all boats, and butter could pull cheese and dry ingredients along with it.

The bear-market signs, however, also make a convincing argument for dairy producers.

First and foremost, milk supply is coming back much stronger than earlier expected. Production in June and July was up 2.7% from the year before, more than twice the historical growth rate.

Cow numbers increased more than 2,000 head per week in the first seven months of the year and are almost back to where they were last fall. In addition, there are 350,000 more replacement heifers available today than there were five years ago, an increase of 9%. (But don’t blame it all on sexed semen; see page 22.)

Most of the incremental milk is going into cheese; hence cheese stocks relative to use are at a four-year high. Supplies of current cheese are typically snug in late summer, but once school milk pipelines are filled, more milk becomes available for manufacturing.

Meanwhile, domestic consumption of dairy products is flat at best. Fluid milk sales are off more than 1% this year. Domestic cheese use is up about 2%, butter is down 2% and milk powders are off 4%. Rising retail prices and a shaky economy aren’t likely to help this situation.

Exports have made the difference, helping to clear growing U.S. milk production in 2010. But even the export market has some question marks. Global dairy markets have been firm during the last six months, but producers in Oceania are expecting a strong spring flush and Europe is still sitting on more than half a billion pounds of surplus skim milk powder. If buyers get too comfortable, Oceania suppliers are apt to move their oncoming production aggressively.

The bottom line is simply this: Now is a good time to line up your marketing plan to protect and build equity in the year ahead.

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