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.
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