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December 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.

Price Recovery Sure But Slow

Dec 21, 2009

By Robin Schmahl

A very difficult year is drawing to a close. Milk prices have been below the cost of production all year for most farmers, with only year-end prices moving nearer breakeven for dairy farms. Yes, it is always sad to see another year moving to the past, but the anticipation is for a better year ahead.

National unemployment rates still remain high, and it does not appear this will change anytime soon. Unemployment effects will continue to trickle down through all areas of the economy as consumer buying power and disposable income is significantly lower.

How this will translate into dairy product demand is yet to be seen. Both domestic and international demand was lower this year had a great impact on prices. Butter exports for the first 10 months of the year totaled 40.8 million pounds, a decrease of 78.0% according to the Foreign Agricultural Service. Exports of cheese and curds covering the same period of time fell by 59.8 million pounds or 23.9%. Nonfat dry milk exports for first ten months posted a 40.0% decline.

The good news is that export interest in beginning to increase. Interest has developed for butter, causing some butter manufacturers to churn 82% butter and build inventory for potential exports. October nonfat dry milk exports in October were 48.0% higher than September and 18.8% higher than the same month last year. International prices are strong lending support to domestic prices.

USDA estimates the national dairy herd will decrease 2.5% in 2010 to average just below 9.0 million head. However, estimated milk production per cow in expected to increase 1.84% above 2009 with an average production of 20,950 pounds. Class III price is forecast to average $15.15-$15.95/cwt. Class IV price is forecast to average $14.60-$15.50/cwt. while the all-milk price should average $16.35-$17.15 cwt., according the recent “Livestock, Dairy, and Poultry” report.

Cooperatives Working Together is taking the credit for increasing milk prices in 2009 by $1.54/cwt., according to an independent economic analysis study. Through the reduction of cow numbers and export assistance, we can say milk prices did not fall as far as they could have, according to this study.

Because the country is not in a controlled environment -- with many other factors being a part of what drives the milk price during the year -- this price may not be accurate. Lest we think this solely added to our mailbox milk check, consider that farmers in the program contributed to make this happen. Low milk prices were the largest contributing factor to the higher milk prices we are now seeing. Cow numbers fell as culling became aggressive and a matter of necessity.

In August, milk production in the country finally moved lower than the previous year, further tightening milk supply. Some states, mainly in the Midwest, continue to increase production over a year ago. Western states have been hit hard with the low milk prices, sending year-over-year production significantly below a year ago.

Now that milk prices are improving, some farms are facing liquidation. Banks are assessing their ability to repay loans and are moving to remove bad debt. It is sad to see dairy farms weathering the storm of a year of low prices only to be forced to liquidate once price begin to improve.

The fact is that the market does not care who stays in business. It moves product and price according to supply and demand. I know there are those who feel the market is manipulated, and that co-ops and private milk plants are out to get them. However, supply and demand drives the market and a small increase in either direction moves the market significantly.

The latest Livestock Slaughter report and the November milk production report are showing effects of improved milk prices with lower slaughter numbers. Dairy cattle slaughter in October fell below the previous year for the first time since April. Cow numbers on the November milk production report were 7,000 head lower following a streak of large declines. Improving milk prices will generally result in less culling as farmers first hold on to cows and add new replacements to the herd as heifers freshen.

The wide block/ barrel cheese spread is a real cause for concern as well as the weakening butter price. Block cheese price remains strong, but for how long? I do not anticipate price to fall drastically, but a retracement in price is likely.

Remember, keep abreast of the market situation and take steps to protect feed prices and milk prices when the opportunity arises. Focus on risk management -- and not greed -- in the coming year.

Upcoming reports to watch for are:

  • November Cold Storage report on Dec. 22
  • November Livestock Slaughter report on Dec. 24
  • Commercial disappearance on Dec. 29,
  • December Agricultural Prices report on Dec. 30
  • December class prices on December on Dec. 31
  • California 4a/b prices on Dec. 31

--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 sign up.

 

 

Markets May Retrace Seasonally

Dec 07, 2009

By Robin Schmahl

Cheese price has moved to the highest price it has been in a year. It has exceeded the level anticipated for the end of 2009. There have been only two main buyers in the block cheese market and their aggressiveness had sellers holding their supply with confidence waiting for higher prices. Some would argue that supply was tight and cheese was not available. However, most bids that surfaced in the spot market were filled indicating cheese was available when the price was right.

The October Dairy Products report released on Friday by the USDA indicated cheese production was higher than a year ago. American type cheese production was 1.2 percent higher, Italian cheese production was 3.6 percent higher, and total cheese was 1.3 percent above a year earlier. Cheese prices have made an impressive rally since mid-July moving from $1.09 to $1.72. This has resulted in a $4.12 increase in the Class III federal order milk price as of Friday with the announcement of the November price at $14.08. Current Class III futures suggest another increase for December.

Lest we get to confident that prices will continue to increase, we need to realize that the market is driven by supply and demand. This is the time of the year with the greatest demand and also the time when markets can become precarious. Seasonally, prices decline into the end of the year as holiday demand become satisfied and inventories again start to build. This is beginning to be seen as barrel cheese and butter prices have been weakening. 

Barrel weakness over the past two weeks widened the block/barrel spread to 26 cents, and the second widest spread in history. Generally, the industry is comfortable when this spread at 3-4 cents. However, this spread has been exceptionally wide for nearly three weeks and is not coming together. Current market fundamentals demand that prices be where they are, and no effort is being made to move price just to bring the spread back to normal. It would not be out of the question to see block cheese price decrease through the end of the year following the lead of barrels and butter. This certainly does not mean prices will again fall apart, but a retracement in price would be seasonal and a normal market movement. I do not expect prices to fall very far.

World dairy prices have been steadily increasing, but are now giving some signs of slowing or stabilizing. USDA’s Dairy Market News publication reported that the latest global/Dairy Trade event for whole milk powder, held on December 1, showed an average price increase of 3.6 percent with an average price of $3,560 per metric ton. The second trading event had anhydrous milk fat averaging $4,349 per metric ton, a decrease of 8.6 percent.

All in all, dairy prices are well-supported and price declines will be limited. We do face a first quarter in 2010 that will be interesting. Stocks of cheese may end the year at the highest level in over 20 years. This in itself may not be an issue. However, it could eliminate some of the buying in the spot market that would normally take place as buyers rebuild aging programs and inventory. More will be on hand than usual. Lower cheese production should balance this out, but it could result in a choppy market early next year.

I recommend the purchase of put options to establish a floor in January and February Class III contracts. Near or at-the-money puts can be purchased for 40-50 cents. March through June protection can be done by using a fence position consisting of purchasing a put option near the current market price and selling a call option for a net cost of 40-50 cents. This will allow upside price potential to $16.50-$17.00 depending on the positions and premium cost. Do not do this on all of your production, but limit it to 50 percent or under.

Upcoming reports to watch for are the World Agricultural Supply and Demand report on December 10; the California Class I price on December 10; the Livestock, Dairy, and Poultry report on December on December 17; The November Milk Production report on December 18; the January Class I price on December 18; and the November Cold Storage report on December 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 sign up .

 

 

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