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

Capturing Milk Prices Into 2011: Where Should Your Focus Be?

Oct 11, 2010

Focus on preparing and implementing strategies to protect your prices now. You may be anxious to get started with 2011 pricing, but don’t overlook the immediate months.

 
Copy of S Schulla Bio PictureBy Steven Schalla, Stewart-Peterson
 
It was my pleasure to once again attend World Dairy Expo and meet people from all parts of the dairy industry and the world. It is easy to see that the overall mood, especially of producers, is much better than this time a year ago. Naturally, higher milk prices have gone a long way to help that cause.
 
Still, there remains a level of tension and nervousness among producers, particularly looking into 2011. 
 
Producers are telling us that the break-even prices seen so far this year are better than the losses of 2009, but little progress has been made to recover, and any sustained dip in milk prices would be devastating. In addition, the recent run higher by grain prices has those who buy the majority of their feed on edge. While things have improved, the emotion and stress around the milk and grain markets continues to run high.   
 
So let’s examine what has taken place, as well as how we need to be prepared for in the months ahead. 
 
Milk market patterns
In conversations about the milk market, I have heard folks say, “All the milk fundamentals are bearish (call for lower prices), so I don’t know why milk prices keep going up.”
 
While it’s correct and important to note that cow numbers and milk production have increased, it is also important to note that cheese inventory growth has slowed dramatically, to 4% to 5% over the last three months. This has caused spot cheese prices to rally and remain strong above $1.70/lb. level, thus rallying nearby Class III prices.
 
There’s a pattern at work here that helps explain why milk prices are rallying. Remember that nasty pattern from earlier this year of milk prices slipping as contracts neared expiration?  Cheese prices were a bit weaker and milk futures prices were at a premium, so, as that month got closer, the futures price had to fall to close the gap. Producers would get frustrated and say, “Why are these strong milk prices just dropping off as that month comes due?”
 
The good news is that pattern has now reversed. Cheese prices are stronger, therefore our milk prices are rallying into expiration, despite the increase in cow numbers and milk production. The tables have turned, and it’s working in our favor.
 
At the same time, there’s still underlying nervousness around the strength of cheese. For example, there have been a few particular days that a trading session opens with offers to sell cheese. Traders recognize that when the cheese price starts to slip, milk can go down quickly. The market interpretation of that is, “Oh no, there’s cheese to sell. Milk is going down.” So when we’ve seen moments of weakness, milk sellers rush in.
 
As a result, this pattern suggests that our focus is best spent preparing and implementing strategies to protect your prices now. While many folks are anxious to get started with 2011 pricing, don’t overlook the immediate months. Position yourself to preserve the current strong prices and avoid a possible dip in cheese prices and the resulting milk selling pressure.
 
It is likely that time is on our side to price 2011 milk.  Both five- and 10-year seasonal patterns call for stronger prices for the first half of the following year being offered in the November and December time frame. While the existence of a pattern does not mean that this will certainly be the case this year, further patience could have positive results, even with a short-term set back in cheese prices.
 
In addition, strong grain prices are also supportive to 2011 prices, as demonstrated by the double-digit gains on Friday’s report day. In other words, if you have some flexibility and your financial situation does not dictate locking in now, be patient for 2011 pricing.
 
In any situation, when considering taking market positions for a long length of time, it is critical to maintain flexibility to higher prices, which can be accomplished in a number of different ways. Utilizing a tool we call “Market Scenario Planning” can be very helpful to really understand how these decisions would perform in various market price scenarios.
 
(I’ve talked about this tool in previous columns. It involves charting out the impact of various strategies if the market goes up a little, up a lot, down a little or down a lot. Knowing the impact of decisions in advance helps reduce stress when markets are moving fast and pressure mounts.)
 
Another feed squeeze?
Grain prices have been equally volatile to milk prices, with corn breaking over $5.00/bu. and meal $300/ton. Friday’s USDA report cutting U.S. average yield to 155.8 bu./acre, along with struggling production in Europe and Russia, has caused corn prices to break out of a two-year trading pattern. 
 
With this development, it is important to recognize that higher corn prices are a strong possibility heading into next planting season. Therefore, this harvest season may provide the right purchasing opportunities to make sure those needs are secured until the crop is off to a good start next spring. 
 
In short, it appears there will continue to be plenty of action in the coming months for both milk and grain prices. This means both risk and opportunity, and now is the time to assess your marketing goals, start to review different price scenarios, and determine how different strategies will reduce your risk and stress levels. 
 
 
 
 
--Steven Schalla is a Market Advisor for Stewart-Peterson Inc. He can be reached at 800.334.9779 or sschalla@stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results.
 
Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2010 Stewart-Peterson Inc. All rights reserved.
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