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April 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.

USDA Estimates Higher Milk Prices

Apr 17, 2009


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.

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.

 

 

The Dairy Market Attitude Has Changed

Apr 01, 2009

By Robin Schmahl


The month of March has changed the direction of the dairy futures market. Futures contracts have increased upwards of $2 per cwt since the first of the month in some of the 2009 contracts. The twelve-month average for 2010 increased 88 cents during the month of March.

Overall, the attitude seems to have changed from bearish to bullish. The gloom and doom of the beginning of the year has quickly given way to a more positive price outlook, at least according to the Class III futures. Along with increasing futures prices comes the thinking by some dairy farmers to purchase replacement heifers at the current lower prices. The idea is to fill up the barn and increase milk output by the end of the year and take advantage of the forecast higher prices.

Cash cheese prices are about 12 cents higher than they were at the beginning of March, but are not yet higher than the price it was near the end of February. That may change in the near future unless the pattern of the past two price rallies holds. Once cheese prices reached or exceeded $1.30 buyers become less aggressive and stepped back allowing cheese prices to decrease. The market seems to be content with price fluctuating from $1.20-$1.33. Despite the available supply of cheese and slower demand, buyers have been interested in purchasing cheese.

Since the beginning of the year, there have been 378 loads of blocks and 147 loads of barrels traded on the CME Group’s cash market. This equates to approximately 15.9 million pounds of block cheese and 6.2 million pounds of barrel cheese. It is apparent that some of this cheese is being purchased and put into storage for later in the year. After all, it makes sense to purchase cheese at these prices to guard against a possible increase if milk supply tightens.  

Commercial disappearance of dairy products during the period of November through January showed a reduction of 1.1% from a year earlier. Fluid milk product disappearance was 0.7% higher. Commercial disappearance of American cheese during this three-month period showed an increase of 2.1% while other cheese decreased 4.0%. Butter disappearance decreased 0.6% while nonfat dry milk increased 6.1%. This is the first rolling three-month compilation that showed negative commercial disappearance of dairy products for quite some time. This is not surprising as demand remained strong until late in 2008.

It is likely commercial disappearance will be negative until the economy begins to strengthen and more people go back to work. With most other areas of the economy suffering from reduced buyer demand, we cannot think that demand for dairy is going to increase. Granted, people will need to eat, but eating habits and varieties of food change when finances are tight. However, the effects from higher culling rates and reduced milk production will have the impact on dairy prices due a tightening milk supply.

My recommendation is to take advantage of the higher Class III futures prices by initiating fence strategies. This consists of purchasing put options and selling call options. A fence will establish a floor and a ceiling. These should be established for the last half of this year. I am recommending a July price spread between the put and call of $1.25, but can then be increased until the price spread increases up to $2.00. This establishes nice downside price protection while allowing you to take advantage of some upward price potential.

Upcoming reports to watch for are the Planting Intentions and Quarterly Grain Stocks reports on March 31; the California 4a and 4b prices on April 1; the March federal order class prices on April 3; the Dairy Products report on April 3; and the World Agricultural Supply and Demand report on April 9.

--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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