In my previous column, I indicated a change in attitude in the dairy markets. Class III futures increased in price upwards of $2.00 per cwt. Farmers attitudes improved as milk futures moved higher. The last quarter of 2009 boasted a Class III price of over $16.00 per cwt which would put most producers in positive cash flow. However, most of the increase in future prices were a product of short-covering with previous sellers buying back their positions. These buyers become aggressive as they feared higher prices to come, and some were forced out of their positions due to margin calls. Emotions were again running rampant with no thought of the price correlation to the underlying cash markets.
Looking at the cash cheese, butter and dry whey prices, it was clear that the increase was unwarranted in relation to the prices. However, this is a futures market and the combination of increased culling, another CWT herd reduction, the USDA announcement of programs that would use 200 million pounds of nonfat dry milk from the CCC, and steady purchasing of cheese in the Exchange was enough to unleash the bullish attitude.
Now, let me get back to the previous statement indicating the increase of $2.00 or more in the futures being unwarranted. During the three-week period of the Class III futures steadily increased, the underlying block cheese price increased 4 cents, barrels declined 2 cents, and butter increased 3 cent per pound. This certainly did not indicate a change in trend nor a tight market. The resulting display of emotion in the Class III futures market was welcomed as it gave some the opportunity to hedge milk production at acceptable and profitable prices. Once the short-covering ran its course the market came back to reality and lower prices followed as the bullish sentiment retreated and the market moved back to align more closely with cash.
I received many calls from farmers wondering what was going on because the futures were declining so rapidly with potentially supportive underlying news. Prices speak for themselves and that is where the futures market will eventually end up. We need to remember that milk futures will converge to the underlying cash and NASS monthly averages. Cash prices will not converge to the futures prices. Cheese and butter prices may increase during the course of the year, but they are not increasing just because futures prices are higher in later months. They will be increasing due to buyer interest and demand.
The USDA increased their estimated for milk prices for this year. According to the World Supply and Demand report released last week, the all-milk price for this year was increased an average of 55 cents to the range of $11.85-$12.35. The Class III price was increased 55 cents to $10.65-$11.15 with Class IV increasing 40 cents to $9.95-$10.55.
The USDA estimates the cheese price will average $1.270-1.320 per pound, an increase of 5 cents from March. The 2008 average for cheese was $1.8954 per pound. The average butter price was increased 4.5 cents to $1.155-$1.235 per pound. This certainly is good news, but a far cry from profitability.
The reason the USDA increased these prices was due to the increase in futures prices since the March report. They do not have any real insight as to what demand will be, what production will be, what weather will be, etc. These prices are changed relative to the price action of the past month. I have watched this for a long time and you can tell whether they will increase their estimates or decrease their estimates based on what the futures market has done. By looking at the price movement on the charts during March, it is evident why they were more optimistic.
Upcoming reports to watch for are the May advanced Class I price on April 17, the March Milk Production report on April 17, the March Monthly Cold Storage report on April 21, the March Livestock Slaughter report on April 24, and the Dairy Products Annual report on April 24.
--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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