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April 2013 Archive for Know Your Market

RSS By: Dairy Today: Know Your Market, Dairy Today

Dairy trading experts offer strategies and practical perspectives to optimize market performance.

Seize the Day As Dairy Margins Improve

Apr 19, 2013

Now is the time to know your dairy's costs, have a plan and develop strategies to capture profitability.

ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin, LLC

Margins have improved. Margins have improved. That is the good news.

Margins show improvement in the first few months (June, July, August and September) compared to last month. The back months (October to March) did not improve much. Lower nearby corn and soybean meal prices (after the USDA’s Grain Stocks report at the end of March) and upward movement in milk prices were the reasons.

Recently, milk has been steady to strong as global supply concerns finally have come to the forefront. Over the past six weeks, the market has focused more on the drought in New Zealand, and also Australia, and what shifts in global demand could be coming.

The charts below show past margins in blue and projected margins in pink. The first chart below shows the margin as of April 18, 2013. The second chart shows last month’s margins as of March 26, 2013. Note the pink lines that are circled in red highlight the improvement in margins. These charts are calculated using 1,560 cwt. of milk, 20.5 tons of corn and 6 tons of meal.

How do you extend these margins to create better cash flow and profitability? Many of us who write on the marketing blog write about knowing your costs, having a plan and developing strategies. Now would be a great time to figure these things out. It’s not a fun job, but the idea that some better opportunities have presented themselves should be motivation. It would be a very good use of the next rainy day.

Look at a plan of forward contracts for your milk, LGM-Dairy or CME milk options. For the feed side, you can use corn and soybean meal options to give you protection against rising feed costs. If you use LGM-Dairy with the appropriate amount of corn and meal, you will have some protection if prices move higher.

Chart as of April 18, 2013

Mortensen April chart 4 19 13

 Chart as of March 26, 2013

 Mortensen March chart 4 19 13

Ron Mortensen is principal of Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products, and owner of Advantage Agricultural Strategies, Ltd., a commodity trading advisor. Contact him at or visit his website.  

Opportunity Knocks: Current Margins Available for Hedging

Apr 15, 2013

Many dairy producers now have an opportunity to protect profits for the rest of the year.

Katie Krupa photoBy Katie Krupa, Rice Dairy

More often than not when I am talking about hedging milk and feed, the current futures prices are less than desirable to many producers. Although there is not an across-the-board definition of good when it comes to hedging, in my opinion, there are currently good hedges available for the milk-feed margin.

As you’ve heard me say before, you’ll want to make sure the current prices line up well with your farm’s financials and risk management needs, but many of you now have an opportunity to protect profits for the remainder of the year.

Rather than take my word for it, let’s examine the current prices. The milk-feed margin that I am referencing is roughly one hundredweight of milk, minus 0.81 bushels of corn, minus 0.009 tons of soybean meal.

Looking at the first chart, you can see the volatility of the milk-feed margin over the past five years with the red line showing the current milk-feed margin based on CME futures trading prices. The red line is essentially the current hedging opportunity for dairy producers. In order to get a better idea of where there current opportunity stands relative to the historical information, I broke the chart down into three sections; bottom 50th percentile, top 25-50th percentile, and top 10-25th percentile.

Krupa graph 4 15 13

As you can see, the current milk-feed futures are trading above the 50th percentile mark through most of 2014, and above the top 25th percentile mark for the end of 2013. While there are only a few months where the milk-feed margin is above the top 10th percentile, there are many month where it is below the 50th percentile mark.

The second chart shows the daily price for the milk-feed margin trading on the CME for August 2013, and December 2013. These margins have been steadily moving higher in the past year with a more noticeable gain made in recent months. While the trajectory is up, what happens in the future is anyone’s guess. We’d all like to think it will keep moving higher and producers will be paid well for their hard work, but unfortunately we all know what has happened in the past, and it’s not always pretty.

Krupa graph 2   4 15 13 png
The biggest reason I like hedging the milk-feed margin is because it protects the most volatile input cost – feed, along with the milk price. The reason I like hedging both the milk and the feed price is because the volatility is extreme for both. If we simply hedged the milk price and ignored the feed, you would only have a partial hedge, and you are still at risk.

Because I am in the business of risk management, my job is not to guess the market but to protect against the unforeseen. When prices are this high, it gives many producers the opportunity to protect against the margin moving lower, while still being able to capture some of the market’s upside potential. These high prices make the job of a risk manager easier in many ways, but we all must be cautious of the greedy green-eyed monster.

Although hedging is not for everyone, I suggest that everyone at least review their current opportunities in order to make the best decision for their business. While no one knows what the future will bring, historically, high prices don’t stick around for too long.

Katie Krupa is the Director of Producer Services with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. You can reach Katie at There is risk of loss trading commodity futures and options. Past results are not indicative of future results.

The Dairy Market Has Gone Global

Apr 07, 2013

The rally that started in the powder markets has quickly spread to encompass the entire dairy complex.

Kurzawski photo 2013By Dave Kurzawski, INTL FC Stone

The dairy market has put us all on our toes again. Just when we thought we knew what makes prices tick, they tock. The price of milk has risen between 5% and 10% in just the past four weeks. And, in my opinion, this is just the beginning of higher prices to come.

It’s not news to say that advances in export demand over the past half-decade are the linchpin of growth for our U.S. dairy industry. Stemming from a confluence of a weaker U.S. dollar, global weather-related production problems and the world’s desire for high-quality dairy foods, the U.S. dairy export market has doubled since 2007 to somewhere close to 13% of total U.S. production.

The growth has not come easily, however, as ebbs and flows in both seasonality and taste preferences of other nations have made for tumultuous swings at the supply/demand margin and prices. And as we’ve focused on the U.S. milk "flush" over the past few months, that global seasonality reared its head and is taking center stage here and now.

Sometime in early March, discussions of drier weather in New Zealand went from "what if" scenarios to a more serious "we have a problem" reality. Chatter reached a fevered pitch, and global prices responded by rising rapidly as buyers focused their concern on the impacts of long-term drought. Earlier forecasts of year-over-year milk production growth in Oceania dried up with the pasture. China and other major world buyers turned a worried eye to the jeopardy this places on next milking season. U.S. buyers followed suit, and the U.S. dairy markets adjusted higher -- and how.

July Nonfat Dry Milk Chart – Chicago Mercantile Exchange

Kurzawski chart 4 7 13

Ironically, the rally that started in the powder markets and has quickly spread to encompass the entire dairy complex comes not only during the "flush" but also on the heels of some robust domestic dairy product production data. For example, U.S. Nonfat Dry Milk (NFDM) production registered at over 137 million pounds in February of this year. While this is down some 20% from 2012, it is still well above the five-year average production of nonfat. USDA reported that commercial stocks of NFDM are around 16.5% higher than they were when we made all that powder last year. And similar production and inventory situations arise across the board for dairy products.

Kurzawski chart b 4 7 13

Although seasonally U.S. American cheese production was down from January, USDA figures marked a record 346 million pounds for the month of February. This is particularly daunting as we see these overall strong product production figures during what is typically a very challenging time period for domestic dairy demand. If you look at our current supply/demand situation from a domestic lens, you’d have a hard time making a reasonable argument that prices should go higher. Yet, dairy prices are on the rise.

In April of last year, block cheese prices were in the low $1.50s, and Class III hovered around $15.00/cwt. two months out. Today block cheese is at $1.75, and Class III futures are $18.00-$19.00 two months out. Class IV prices are even higher. To many, this doesn’t make much sense given the facts of the day. But it’s the futures markets for dairy that have led the charge higher as we shift our focus to the uncertainty of market conditions ahead.

So what are producers to do?

As profit margins increase courtesy of weakening feed costs, the sensible approach is to focus on bringing profit home to your operation. Within that approach, however, recognize that markets can act highly irrational as uncertainty looms. I expect this to mean higher milk prices going into the summer months. Take advantage of price increases as they happen. Lock in profit as you can. Or secure a floor price on your production. Banks will accept some rough times but have a hard time swallowing $4.00 and $5.00 per cwt. losses like were experienced in 2009. And you don’t want your dairy to be blowing in the breeze when the world realizes it has enough dairy in its fridge.

Dave Kurzawski is a Senior Broker with the Chicago office of INTL FCStone. INTL FCStone offers comprehensive risk-management and margin hedging programs and services to dairy producers, processors, traders and end-users. You can reach Dave Kurzawski at 312-456-3611 or

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