AgDairy Market Update
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 reports take on new role
Dec 02, 2008
By Robin Schmahl
Three important reports were released last month by the USDA, but milk prices showed no reaction. These reports were the October Monthly Milk Production report, the Monthly Cold Storage report, and the Livestock Slaughter report.
One thing to keep in mind is that the information on these reports is already factored into the market in the physical aspect. The milk produced in October has already been manufactured, bottled, dried and consumed or stored. The amount of cheese and butter in cold storage has already changed over the three weeks since the end of the month.
Dairy cattle from the current report were slaughtered three weeks ago and milk production from the remaining or added cows is being processed and is moving through the pipeline. Historically, these reports were watched very closely and Class III futures would move relative to the report results. However, these reports have migrated from market moving to more of a trend indicator and barometer of consumer demand.
Monthly milk production has not shown a decrease from the previous year since June 2004, but the overall trend does show the percentage of growth is slowing. This is understandable, since production cannot grow at a similar or higher rate consistently year after year.
In 2004 the annual year over year change in milk production for the 50 states was only 0.3%. Production then jumped in 2005 as a result of record high prices in 2005 with an average monthly change of 3.5% over the previous year. The annual increase in 2006 was 2.7% and 2007 increased 2.0%. So far the change this year has been an increase of 2.4% over last year with two months yet to go. This is expected to slow down in 2009 as tight margins are expected to limit milk production growth. The USDA expects cow numbers to decrease with a possible overall herd decline of upwards of 100,000 cows. However, they do anticipate milk production to increase, but only by about 1.0%, reaching to 191.5 billion pounds according to their latest Livestock, Dairy, and Poultry report. This is well below the growth of the past few years.
Monthly cold storage reports give an indication of demand. Seasonally, stocks will increase during the first half of the year and then decrease the second half. This year, total cheese stocks increased the first half, but at a slower rate than last year. However, after peaking in June, stocks have decreased more slowly than the previous year. This trend indicates the slowing demand that is being experienced due to the economy. If you can recall, all commodity prices peaked around that time and have basically fallen ever since.
The current lower prices are attempting to find levels where demand will continue strong enough without allowing stocks to grow much further. However, with the current state of the economy, lower prices may not result in consumers increasing their buying habits anytime soon. With jobless claims last week running at a 16-year high, disposable income is becoming tighter and consumers are cutting costs wherever they can. One can only hope that consumers will not cut back much on overall spending for dairy products for nutrition sake.
The Monthly Livestock Slaughter report indicates profitability on the farm, unless of course, slaughter numbers are increased due to a CWT Herd Reduction program of which the latest round of bidding has now been closed. When the proverbial belt is tightened due to narrow profit margins, the next step is to cull cows heavier eliminating the lower producers from the herd. Periods of high milk prices generally result in lighter culling as the lower producing cows still pay their way and another heifer calf is possible from those cows. So, rather than monthly dairy cattle slaughter being a market mover, it is one of the main reports to show the state of the industry at the farm level.
All in all, these reports and others are important to the industry and will continue to be important to assess supply, demand, and pricing. These reports give us information that we need to make decisions in marketing our milk or milk products.
Upcoming reports to watch for are the November Agricultural Prices report on November 28; the California 4a and 4b prices on December 1; the October Dairy Products report on December 3; and the November federal order class prices on December 5.
--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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