Jul 26, 2014
Home| Tools| Events| Blogs| Discussions| Sign UpLogin


October 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.

The Future Looks Brighter

Oct 26, 2009

By Robin Schmahl

Milk prices have been improving the past two months, but still are generally below the cost of production. The October federal order price will be announced on Friday and will be near $12.70. Looking at the futures contracts, one can get more excited over milk prices next year. Class III futures prices for 2010 currently show March through December contracts averaging near $15.30/cwt.

Throughout the year the cry has been for lower production. Cow numbers were too high and production too strong for demand. This problem would be solved if the economy rebounded quickly resulting in increased demand. There are signs the economy is getting better, but it will take awhile. In the mean time, measures have been taken to improve prices by killing cows and temporarily raising support prices. There has also been much discussion and recommendations made to control production as a means to improve and stabilize milk prices. None of which have yet come to fruition.

The combination of CWT’s herd reduction program and continued low milk prices are getting the job done. The September milk production report indicated cow numbers were 197,000 head lower than the previous year. This has reduced milk production. In fact, so much that some processors are now indicating production has fallen too much and they are having some difficulty getting enough for needs. Milk handlers in California do not have any previously imposed quotas in place and have actually encouraged producers to increase production. Class I demand is strong despite the interruptions from the flu, which is causing many schools to close down for a few days.

Milk production is on a downward trend with September milk production 0.7 percent lower than the previous year according to the USDA. U.S. milk production has now declined four consecutive months. This lower trend has been anticipated and is welcomed by farmers. Milk prices are improving as a result and Class III futures indicate higher prices to come. World prices continue to improve, aiding the milk price recovery.

Caution must be exercised however, as this time of year generally shows a demand increase followed by a few months of slower demand. We cannot feel comfortable that milk prices will continue to increase as suggested by 2010 futures. September cheese inventory did see some reduction in the latest cold storage report, but not near the average decrease seen in other years. If cheese stocks do not decrease as much as they should and inventory begins the New Year somewhat burdensome, a significant price recovery could take longer to materialize. Buyers may not need to step up and replenish aging programs quite as aggressively as most other years.

Lower milk production will eventually tighten the availability of dairy commodities and thereby increase prices. This is what we have been waiting for all year.

Upcoming reports to watch for are the October Federal Order class prices on October 30, the Agriculture Prices report on October 30, the California 4a/4b price on November 2, the September Dairy products report on November 4, and the World Agricultural Supply and Demand report on November 10.

--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.

 

 

Dairy Product Prices Rise

Oct 12, 2009

By Robin Schmahl

Dairy markets definitely have turned over the past few weeks. Higher cheese, dry whey and nonfat dry milk prices have changed the attitude of many. The combination of higher culling, farm auctions, and two completed Cooperatives Working Together (CWT) herd retirement programs with a third in the works has tightened milk supply.

In fact, it has tightened it enough to cause some processors to feel that maybe too much has been done to eliminate cows and decrease milk production. Milk supply is tight, but adequate. Cheese stocks are adequate with orders being filled. Butter supply is readily available keeping price in a narrow trading range.

Tightening milk supply is having a definite impact on the availability of nonfat dry milk. Prices continue to increase on almost a daily basis with strong Class I demand. Dryers have been running on reduced schedules. That which is available is being used to fill existing contracts with virtually nothing left for the spot market. The Grade A nonfat dry milk price has increased 28 cents per pound over the past month and 45 cents since the beginning of the year. Production of nonfat dry milk for human use during the month of August was 105.6 million lb., a decrease of 20% from July and 8.3% lower than a year earlier. Monthly ending stocks of nonfat dry milk were 17.3% lower than a year ago. It is unusual to see nonfat dry milk steal the spotlight of the dairy complex. It generally hovers near support with much of it sold to the CCC. Buyers became more aggressive when New Zealand based Fonterra cooperative held two auctions for full cream nonfat dry milk which resulted in price increasing 50% on the world stage.

Dry whey has caught the attention of the industry with increased demand. The NASS weekly nonfat dry milk price topped 30 cents in mid-September for the first time since the week ending February 2. Production has been active with demand increasing both domestically and internationally. The increasing whey price has a definite affect on the Class III price with each penny increase resulting in a 6-cent increase in the Class III.

One concern echoed in the industry is that of the current steps taken, or may be taken, by countries to support dairy prices. The U.S. has increased support prices for cheese and nonfat dry milk in the attempt to increase farm level prices with another potential increased being discussed. Money was available to fund the first increase, but another appropriation of $350 million was proposed for more aid. The proposal was for another $60 million to be used to purchase dairy products from the marketplace and donate them to food programs. The other $290 million is for direct aid to farmers to be distributed in some way by the Secretary of Agriculture. This is still being considered and has not been voted on. The European Union has increased export subsidies. Hungary’s farm minister recently urged the European Commission to temporarily raise export subsidies by 50 percent to increase exports and reduce oversupply. These activities move the world dairy industry into an export subsidy war between countries. This, unfortunately, prolongs a genuine recovery in prices. A quick fix will get us out of a tight spot, but there will be consequences that will need to be dealt with at a later time.

It is good to see prices increase after a long period of low prices. Higher prices have been long overdue and many ideas have been discussed to decrease production. I dare say that an improving milk price will put some of these ideas to rest or at least on the back burner until the next downturn in price unfolds.

Class III futures have increased over the past few weeks, primarily through the middle of 2010. This is giving opportunity to establish my previously recommended fence positions. I recommend purchasing a $14.75 put option and selling a $16.50 call option for 50 cents for the first quarter of next year. Use the same strategy for the second quarter, but increase the option spread to $2.00. Place orders to purchase $15.00 put options and sell $17.00 call options for 50-55 cents. This establishes a good floor while leaving the upside open to take advantage of a higher price up to the sold call option. Remember, you have downside risk. Your risk is not to the upside.  

Upcoming reports to watch for are the September Milk production report on October 20, and the September Cold Storage report on October 22.

--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.

 

 

Log In or Sign Up to comment

COMMENTS

Receive the latest news, information and commentary customized for you. Sign up to receive Dairy Today's eUpdate today!

 
 
 
The Home Page of Agriculture
© 2014 Farm Journal, Inc. All Rights Reserved|Web site design and development by AmericanEagle.com|Site Map|Privacy Policy|Terms & Conditions