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Know Your Market

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Dairy Market 2011: Year in Review

Dec 05, 2011

2011 was a good, not great, year. Cycles, seasonal patterns and fundamentals have played out according to principle and rule, without surprise. 

Carl BablerBy Carl Babler, First Capitol Ag


Viewing forward commodity price and price opportunity is a requirement of a dairy marketer, and looking backward is typically the wrong approach. 

However, a look backward at commodity market action, price behavior and fundamental conditions that have played out is helpful from an educational standpoint. With this in mind to better “Know Your Market,” I offer the following observations relative your 2011 dairy market.
2011 and the Three-Year Class III Milk Price Cycle
With 2009 observed as the obvious three-year Class III milk price cycle low year, the following cycle expectations were possible:
·                     2010 possible gathering recovery year
·                     2011 possible strong/cycle high year
·                     2012 possible weak/cycle low year
The 2011 price was strong with five different months announced above $19.00, including a record $21.67 price announced for August. 
Babler Class III
Observation: The 2011 milk market followed three-year price-cycle expectations very well.
2011 and Seasonal Price Pattern
Seasonally each year there is an expected price direction for given periods of the 12-month calendar. A price low for the year was observed in the first quarter of 2011, and price moved directionally higher into third quarter of 2011.
Observation: The 2011 milk market followed its typical seasonal price pattern with an extended price rally into late November. Babler chart   milk cows   12 2 11
2011 and Supply and Demand Fundamentals
During the course of 2011, price and revenue improved and, as expected, cow numbers increased. The U.S. dairy cow herd total trended higher during 2011. To date, the herd numbers 9.219 million head, the highest number since June of 2009.
Observation: The 2011 milk market reflected production chasing higher prices with an increase in the cow herd.
2011 and Production Margin and Profitability
During 2011, even with price/revenue improvement, margins have been modest. Income over feed cost has spent the entire year to date narrowly on either side of $9, the 10-year average USDA calculation. Babler chart   Income over feed 12 2 11
Observation: Cow numbers and production expanded during 2011, even in the face of modest margins.
2011 and Dairy Exports
The U.S. dairy export value continued a positive trend, which started in early 2009, to record values through summer of 2011. The growing dairy export participation by the U.S. has been a very positive fundamental for your market in 2011. After three years of growth, we slowly have become somewhat dependent on export business as we have geared up production and processing to meet this additional demand. 
Babler chart   exports   12 2 11
With that said, the loss of a quarter or a third of this export trade, for any reason, would quickly result in a domestic oversupply.  
Observation: Exports have been strong, but exports of cheese and butterfat have been declining recently.  
2011 and Risk Management Strategies
With the opportunity to look backward, it is easy to identify which marketing strategies worked best in 2011. In a strong price year, marketers were well served by employing hedge strategies that allowed for some upside price opportunity.
Observation: The use of straight puts, option “fences” and long calls covering fixed price contracts or sold futures worked well. Obviously, selling milk forward with futures or on a fixed priced cash contract in a possible three-year price cycle, high-price year was a less favorable approach.
Conclusion: 2011 was a good, not great year. Cycles, seasonal patterns and fundamentals have played out according to principle and rule, without surprise. What lies ahead should also be viewed with cycles, patterns and fundamental principles clearly in mind. Thus, a case to “Know Your Market.”  
Carl B. Babler is a consultant and senior hedge specialist with First Capitol Ag in Galena, Ill. He has been involved in the futures industry as a broker, educator and hedger since 1975. Babler holds master’s degree from the University of Wisconsin-Platteville and completed agribusiness course work at Harvard University. You can reach him at 1-800-884-8290 or
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