By Robin Schmahl
Following a week of steady cheese prices, buyers pushed blocks to a new high for the year during last Friday’s trade. Class III futures moved July, August and September futures over $16.00. The last time the announced Class III price was above $16.00 was October 2008.
Aggressive buying from two main buyers over the past two months supported the market, improving the milk price outlook for next year immensely. The block/barrel spread does cause a bit of concern as it remains unusually wide. However, it is anticipated to move to the normal 3-4 cents soon. The fact that blocks did not weaken to narrow the spread, but that barrels had a greater increase than blocks on Friday was very encouraging.
It stands to reason that milk prices should be improving. Cow numbers have been declining, bringing production down with it. However, milk production has not declined as much as anticipated given the fact that per cow production has been increasing from the previous year as cow numbers have fallen. In fact, year-over-year production per cow has increased steadily from the previous year since February 2007. As a result, production has fallen below year earlier levels the past five months, but the decline has been limited. Cow numbers are 226,000 head lower than a year ago with production declining only 1.1%. However, this was the largest year-over-year decline since March 2004.
All farmers have been hit hard with prolonged low milk prices, but Western states are showing the largest production declines as farms are going out of business and culling has been heavy. California’s production has declined since October 2008 with the latest report showing production down 6.3% from a year earlier. By contract, the second highest milk producing state of Wisconsin continues to increase milk production with the latest report showing a 3.5% gain. What it mainly boils down to is production has been falling in Western states while Midwestern states have been increasing production. This is interesting and one to watch going forward.
Cow slaughter has already given a sign that the potential for higher milk prices may begin to play a part in culling. The October Livestock Slaughter report showed dairy cattle slaughter at 227,000. This was 10,000 head lower than September and 9,000 head less than the previous year. Cows will be moving to slaughter under the latest round of the CWT herd reduction program this month and through December, potentially increasing slaughter numbers again. But with higher prices on the horizon, these numbers may be overwhelmed by some replacements coming into the milking herd.
Milk prices have been increasing and the futures prices suggest steadily higher prices to come in 2010. This is happening despite no action being taken as far as the implementation of a supply management program. As I have mentioned before, much of the ideas that have been discussed seem to have been put on the back burner. No one wants supply management when price are improving. Interestingly, European Union farmers have been dealing with low milk prices along with everyone else around the world even though they have had a quota system. However, they have now decided to move to a more liberalized market and have plans to eliminate their quota system after March 2015. With the volatility of the past few years for milk and dairy product prices, the EU is investigating the establishing a dairy futures market on the London International Financial Futures and Options Exchange (LIFFE). New Zealand is also looking at introducing a whole milk powder contract on the New Zealand Exchange (NZK).
So, it appears that those countries that have had a supply management system in place are making to move to where the U.S. is and has been with a free market system. Globalization in the dairy markets has happened quickly and the industry needs to adjust and embrace it. We are not an island unto ourselves.
Upcoming reports to watch for are the Consumer Confidence on November 24, Commercial disappearance on November 24, The Agricultural Price report on November 30, the California 4a/b prices on December 1, The November class prices on December 4, and the October Dairy Products report on December 4.
--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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