Export Assistance – A Better Way to Go
Apr 01, 2010
by Robin Schmahl
Cheese prices have made a nice turn upward during the past two weeks, sending Class III milk futures significantly higher in a short period of time.
Traders have been waiting for a retracement in futures for quite some time. Contracts relentlessly declined as premium eroded out of the market, and steady cheese prices did not lend any support to the market. Fundamentals were bearish and buyers were cautious. Manufacturers wanted to move cheese to the market quickly and did not want to hold on to wait for a higher price.
As the calendar turned to spring, cheese prices began to rise. One buyer came to the spot market attempting to purchase some needed cheese and found no one willing to sell. This prompted aggressive bidding that pushed cheese prices higher on a daily basis. Futures traders jumped to liquidate their sold, or “short,” positions to minimize their exposure.
Milk futures increased as buying became aggressive. Contracts quickly added premium back into the market, pushing prices significantly higher than the underlying cash prices. Cheese prices need to continue to increase or Class III futures will settle back in line with cash.
Overall, the trade remains cautious. The cloud of large inventory hangs over the market and may limit upside price potential until this comes into balance. Inventory and cow numbers will need to decrease in order to tighten the milk and cheese supply. Of course, increasing demand will do wonders for tightening the market and sustaining higher prices.
After more than a year of inactivity, Cooperatives Working Together (CWT) reactivated its export assistance program on March 18. So far, there have been sales of 2.1 million pounds of cheddar cheese to the Middle East.
I applaud the CWT for reactivating this. I have long thought more emphasis should be put on this program rather than the herd retirement program. Under the herd retirement program, killing cows is just that: killing cows. And, as we have seen in the past, the impact of this has been minimal.
Export assistance is a two-pronged approach. It increases exports of finished dairy products to other countries and hopefully minimizes inventory growth. It also sends our products to countries that normally purchase a limited amount, if any. This, in turn, could increase our market share as these buyers use our high-quality products.
Increasing market share should be the main goal of the dairy industry. I trust CWT will put more money and effort into the export assistance program.
One of the reasons I have not been an advocate of a supply management program is that I feel it will not work effectively unless imports are limited as well. If a quota system is implemented on milk production, and demand increases, buyers will turn to the import market to obtain the products they need. This will reduce our market share and keep prices in line with world prices anyway.
The dairy market is global and will need to compete globally. Yes, there is a system in place for quota imports, but there also is the ability to purchase high-tier dairy products. A higher price needs to be paid for these over-quota imports, but these have been willingly paid for in the past under certain circumstances.
For instance, butter imports in January, according to the Foreign Agricultural Service were 1.1 million pounds, double the amount a year earlier. High Tier imports (above quota with a penalty) were 15.4% higher compared to a year earlier.
We certainly do not want to limit our ability to produce milk while at the same time Europe and New Zealand are attempting to establish dairy futures markets and move to a free market system without production quotas. (All countries struggled last year with low milk prices even though a quota was in place in some of them.) This would be a move in the wrong direction.
· World Agricultural Supply and Demand report - April 9
· California Class I price - April 12
· March Monthly Milk Production report - April 19
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 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.