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November 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.

Milk Price Outlook Continues to Improve

Nov 23, 2009

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.

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.

 

 

Something Needs to be Done, or Does It?

Nov 09, 2009

By Robin Schmahl

Dairy product prices have been exhibiting some real strength over the past few weeks. Cheese prices increased from aggressive buying as demand for fresh cheese picked up and orders needed to be filled. We know there is plenty of cheese in storage that is available to the market. However, daily cheese price on the CME spot market is a component of the milk price. Cheese traded on the spot market cannot be over 30 days old. If demand for fresh cheese increases and the availability is tight, the price will increase regardless of the amount of cheese in cold storage. If the amount of cheese in storage is low, but there is reduced demand for fresh cheese, price will decrease.

There has been much discussion over the years of the viability of pricing the nation’s milk based on trading at the spot market. For years, cheese and butter traded only once per week, and eventually moved to daily trading. More discussion surfaces when milk prices decline, especially when little trading has taken place. When prices increase, farmers are happy and have no problem with cash prices increasing on little or no trading. They know they will be receiving a better milk check.

The implementation of a supply management system to keep prices higher has been discussed. Some of this discussion has recently fallen to the back burner due to the increasing prices. This seems to be a pattern. There is no easy solution to keeping supplies available, prices high at the farm level, and affordable prices to the consumer. So something needs to be done in one form or another to minimize the boom or bust cycle that the dairy industry has moved into. Just simply killing cows is not the answer as higher milk prices will result in increased cow numbers.

Irregardless of whether something will eventually be implemented, all producers and manufacturers have the futures and options market available to protect prices and profitability. Marketing your milk is not easy and no one wants to give up any price potential. So, many get involved in using futures and options in order to outguess the market. They intend to make money in their account as well as receive a higher milk price. Trying this speculative approach many times results in frustration and money lost. Instead, the futures and options market needs to be used as a tool to hedge a profitable price when feasible. You need to look at the long-term. Being able to increase equity in your operation and cash flow consistently is much the same as having a supply management program in place. Only this allows you to produce as much milk as you wish as well as expand the operation to bring in other family members.

Those who have viewed marketing as price protection have been better off this year. They hedged good prices for the year back in 2009 and have not felt the strain quite as much as those who decide to take the highs with the lows.

I am becoming concerned that a similar situation is developing now as it was during the first half of 2008. Milk prices are at a significantly different level, but the same idea seems prevalent. Many are anticipating that milk prices will improve dramatically now that milk production is slowing and cows are being killed. Futures prices have moved above the cost of production in many cases, but the recent idea is that milk prices will move as much as $4.00 higher sometime in the first half of the year. This is again causing farmers to be willing to fill barns with cows or expand to make up for lost income. So, instead of implementing a strategy to allow for higher milk prices as well as establish a floor to protect price, most will opt to do nothing.

This year will be a critical year for many in the industry. Utilize what is available to lessen your chance of becoming a casualty.

Upcoming reports to watch for are the World Supply and Demand report on November 10, the fluid milk sales report on November 13, the Monthly Livestock, Dairy, and Poultry report on November 17, the October Monthly Milk Production report on November 18, and the October Monthly Cold Storage report on November 20.

--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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