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January 2009 Archive for AgDairy Market Update

RSS By: Robin Schmahl, Dairy Today

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.

USDA lowers milk prices substantially

Jan 22, 2009

By Robin Schmahl

There has been and still is controversy over the duration of low milk prices. Obviously, many in the industry are concerned over milk prices that will be significantly below the cost of production. Changes are being made in all areas of the individual farms to lessen the impact of the lower milk prices. The Milk Income Loss Contract payments will begin in the month of February aiding the bottom line to some extent. However, the duration of this downturn in price is the real concern.

The low milk prices should affect production quickly as cows will be culled to cut back on expenses and provide some immediate income. However, this will decrease the amount of milk in the tank resulting in less income on the milk check. There will be cows and heifers available for purchase to fill the empty stalls, but will it be cost effective to do this? This is a time when pencils will be pushed, all aspects of the farm will be scrutinized, hope will reign, and in some cases decisions will be made to exit the dairy business.

The downturn in prices was bound to come as history will always repeats itself and higher prices will always result in more milk production, eventually tipping the balance to an oversupply relative to demand.  We have seen the movement to rBST-free milk and have experienced the CWT herd reduction programs which were anticipated to keep the milk prices high.

These two items, as well as others, were anticipated to limit production enough to insure continued high milk price. However producers will always respond to higher prices with more milk production. The high grain prices in 2008 had limited impact on production. Some feed was forward contracted while others made adjustments resulting in 4.0 billion more pounds of milk produced in 2008 from the addition of 113,000 head of cows according to the USDA. Milk production in 2008 increased 2.2 percent over 2007.

It sadly appears that low milk prices may be with us for some time. Overall dairy exports for November were $219.5 million, a decrease of 37 percent from last year and 37 percent from the first 8 months of the year. The bright spot is that overall exports for the year are running 32 percent higher than the previous year. The first three quarters of 2008 showed great export demand, but unfortunately this is coming to an end.  Cheese exports continue to decline with November exports totaling 8,498 tons, down 11 percent from last year.  Butterfat exports in November were 3,923 tons, down 43 percent from a year ago. This is less than half of the monthly volumes exported in the January-October period. Exports of nonfat dry milk/skim milk powder in November were 16,025 tons, down 44 percent from a year ago and the lowest amount in over a year. The recent trend does not bode well for the early part of this year. We cannot expect milk price to turn around until the economies of the world improve, people feel confident about their jobs, and people go back to work.

The February California Class I prices are giving an indication of what will be seen in the federal orders. The price was announced at $11.27 in the North and $11.55 in the South. This was a decrease of $6.15 and $6.14 respectively and the lowest prices since 1979.

The USDA lowered their estimate for milk production for 2009 from 191.4 billion pounds to 190.4 billion pounds. This would still be an increase of 900.0 million pounds from 2008 and the smallest increase since 2004. The all-milk price is estimated to range from $11.80-$12.60 versus the previous estimate of $14.95-$15.75. The Class III average was lowered $3.90 per cwt to the range of $10.60-$11.40 with the Class IV decreased 75 cents to $10.00-$10.90 per cwt.

There is no question 2009 will be very challenging. The current milk futures do not offer much in the way of opportunity for price protection. The focus should remain on feed protection. The market has experienced two bearish supply and demand reports, but prices continued to remain in an overall uptrend. Corn is about 80 cents per bushel higher, soybeans are $2.40 per bushel higher, and soybean meal is $80.00 per ton higher than a little over a month ago.  Do not be complacent and remain satisfied with purchasing your feed hand-to-mouth as some suggest. Initiate a strategy to protect against higher feed prices.

Upcoming reports to watch for are the December Cold Storage report on January 22; the December Livestock Slaughter report on January 23; the February advanced Class I price on January 23; the January federal order Class prices on January 30; the January Agriculture Prices report on January 30; and the California Class 4a/4b prices.

--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.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

 

A Good 2008, But a Rough 2009

Jan 08, 2009

All commodity markets realized unprecedented movement in 2008. Optimism in the early part of the year turned quickly mid-year in reaction to the World economic situation.

The failure of banks and major investment firms caused many investors to panic and pull their money out of the markets. Scandals were uncovered, increasing the desire to pull money out of investments. This increased panic spilled over into all commodities as those with diversified their portfolios needed to trim their exposure. In addition to this, crops eventually were planted and milk production did not decline as expected. Consumers have now moved into survival mode and have changed buying habits significantly.

What has this changed market to dairy prices? It has resulted in prices at multiple year lows.

Cheese and butter prices seemed to be immune the weakness taking place in the other markets. Buyers remained willing to purchase cheese at a higher price through the early part of December. The time of year buoyed the market prolonging the inevitable decline in prices. However, price finally succumbed to the slowing economy and cheese prices fell near support by the close of the year. The average Class III futures price for 2009 has made an unprecedented decline falling $8.03 per cwt. during the last half of 2008. The 2009 February Class III contract is the lowest with the price closing the year at $10.28. If this price is realized for February it will be the lowest announced price since June 2003. In fact, current prices would equate to a Class III price near $9.40 if the cheese, butter, nonfat dry milk, and dry whey price remain at the present levels for the next month.

The butter price has fallen to the lowest level it has been since July 2003, adding pressure to the milk price. Nonfat dry milk and dry whey prices were the leaders with prices falling from record high levels in 2007 to multiple year lows and in the case of nonfat dry milk, product moved to the CCC on almost a daily basis since early October. A total of 114.6 million pounds were purchased by the CCC during the final three months of 2008.

World dairy prices have fallen significantly over the past year indicating that dairy prices may not recover very quickly unless world prices begin to recover. World demand will need to turn around and increase before prices will turn higher. Unfortunately, World dairy prices are anticipated to remain depressed for most of 2009. Along with these lower prices, U.S dairy exports are expected to decline as much as 35 percent during the year. 

Dairy producers have not yet felt the full impact of the falling prices. The December Class II price was announced at$11.21; Class III was $15.28; and Class IV was $10.35. Lower prices will be felt earlier by those who have a higher utilization of Class II and Class IV milk. Others will not feel the real brunt of it until the January milk checks come during February. The average Class III price for 2008 was still a respectable $17.44 per cwt.; a decrease of only 60 cents from the 2007 average.

So, what is there to do now? My earlier recommendation was to hedge feed prices for next year and that recommendation continues to be relevant. In fact, corn price has already increased $1.00 per bushel in the past month. Soybeans have increased $1.90 per bushel with soybean meal increasing $60.00 per ton. The potential for higher prices is very real and you do not want to watch feed prices escalate again at a time when milk prices will be well below cost of production. This will compound the problem.

Upcoming reports to watch for are the January World Supply and Demand report and Crop Production report on January 12 and the December Milk Production report on January 16.

--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.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

 

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