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June 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 Production Continues to Remain Strong

Jun 21, 2009

By Robin Schmahl

How long can we hold on? That is the question running through all dairy farmers minds.

The last time we went through the first half of the year with prices below $10.00 was in 2003. Once the calendar moved into the second half of the year, prices rebounded above the $14.00 level before falling back to $11.00 by the end of the year.

The current future market outlook is not so kind as the highest price seen through the end of this year is in the mid-$13.00s. Even that price is below most producers’ cost of production. A big difference between this year and 2003 is the significant increase in the cost of production making it extremely difficult and impossible to cut costs enough to maintain profitability. Of course, this is in and of itself without any forward pricing of milk. Those who took advantage of prices the futures market offered last year and earlier this year are in a much better position than those who did not. Of course we cannot turn the clock back, but need to move forward and do what needs to be done.

So how long will milk prices remain low? Well, recent history would suggest prices would remain low for about a year before stronger prices would be realized. If this is the case, prices will remain low for another six months or so before stronger prices will be realized. This is not welcomed news as another six months of this would be devastating. However, seasonality and historical cycles seem to be a thing of the past due to changes in the dairy industry and markets.

Cheese and butter buyers are purchasing when they feel they need to rather than when they seasonally did. They are not opposed to paying for storage for a longer period and would rather do that than chase the market higher when supplies are tighter. Dairy markets have been more global in recent years and this has had a large influence on prices.

The U.S. dairy farmer is not alone in the struggle of low milk prices. All dairy exports and demand from other countries have fallen significantly. Protests over low milk prices have erupted in other countries. Last week, a procession of 500 farmers on tractors drove their tractors into Brussels before a European Union summit was to commence. Traffic in the city was clogged causing chaos. They were protesting low milk prices and demand more be done in addition to what the EU has already done. Their subsidy program was re-instated earlier this year as well as increasing raising the ceiling of the amount of dairy products that can be put into the public intervention program.

It was anticipated low prices along with another CWT herd retirement program would have tightened milk supply and supported prices somewhat by now. However, the opposite is true. Milk production continues to remain strong with USDA’s latest milk production report showing May production in the top 23 states still showing an increase in year-over-year production. Production in these states increased 0.2% with U.S. production up by 0.1% despite the fact that there are 43,000 less cows in the country than a year ago. Increased production per cow and lower demand is causing a backup in manufacturing facilities. There are trucks waiting upwards of 18 hours to unload at facilities before they go out and pick up more milk. There have also been farmers that have dumped their milk due to the fact that the plant cannot pick it up before the next milking and the tank is full. Plants are paying the farmers for the milk, but directing them to dump it until such time as they can pick it up.

Desperate times are calling for desperate measures, and farmers are doing what they can to survive. Cash grain farmers were looking at a similar situation late last year with higher fertilizer, fuel, and equipment prices indicating returns below the cost of production.

That has changed with the surge in grain prices this spring. However, the price has run its course and those who have not hedged any production will likely risk selling their crop below the cost of putting it in. The same goes for dairy producers who planted crops to feed the cows. It costs money to plant that crop and even though you will be feeding it, the worth of the crop needs to be protected. You do not want to end up planting and harvesting the crop only discover you could have purchased it cheaper than it cost to plant it.

My recommendation is to purchase put options for your feed production for both corn and soybeans. This can either be done by purchasing a straight put option (which is pricey) or buy a put option spread consisting of purchasing an at-the-money put option and selling a lower strike price put option against it to cheapen the cost. I have no new recommendations for milk.

Upcoming reports to watch for are the May Livestock Slaughter report on June 26; The June Agricultural Price report on June 29; the California Class 4a/4b prices; the federal order class prices on July 2; the May Dairy Products report on July 2; the World Agricultural Supply and Demand report on July 10; fluid milk sales on July 10; and the California Class I price on July 10.

--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.

 

 

Temporary Measures May Have Long-Term Consequences

Jun 09, 2009

By Robin Schmahl

We are nearly to the half way point of the year and a milk price rally has yet to materialize. There has been much anticipation for stronger milk prices through the second half of the year, which stemmed from the idea that heavier culling and the implementation of the CWT herd retirement program would be enough to cause milk supply to tighten. The theory was correct, but the anticipated effect has not yet materialized  

It seems that a significant price rally may have difficulty materializing during the remainder of this year. For one thing, we are not alone in this. Dairy farmers around the world are facing similar difficulties as a result of low milk prices. Europe has revived their exports subsidy program and the U.S. has revived the Dairy Export Incentive Program. Dairy farmers in the Oceania region do not have any type of subsidy program and feel they are at a disadvantage. They feel the actions by Europe and the U.S. will prolong the low milk prices. One thing we need to realize is that milk prices are not low in-and-of-themselves but are the result of the world economic situation.

The severe downturn in the world economy is something that was not anticipated a year ago. A recession was looming, but not as severe as what has taken place. I am hoping that the economy turns around resulting in people going back to work and demand for dairy products will increase.

I do see a potential downside if prolonged low milk prices remain and measures are implemented to curtail milk production through various means. Measures that will eliminate cows, eliminate farms or reduce milk pick-up to force milk prices higher domestically will be a short-term fix which may put us at a disadvantage in the long run. A higher domestic price and a lower world price will only open up for increased imports. Don’t get me wrong. I would like to see high milk prices along with everyone else and as soon as possible. However, if drastic measures are implemented eliminating milk production potential or the desire to produce milk, this market share may be filled by other countries. We have seen this in industrial manufacturing to some extent. Much of what we produced now comes from other countries as they can produce it cheaper than we can resulting in the loss of domestic market share.

There is no easy answer to the dilemma currently facing dairy farmers. A stronger economy will go a long way to accomplish higher milk prices. It has only been a short period of time since we had record high milk prices. In 2007, the average Class III milk price was $18.04. The average Class III for 2008 was $17.44. Yes, cost of production has increased significantly over the past two years requiring a higher milk price for profitability.

This brings us to the point of the need for marketing and hedging milk above the cost of production when those opportunities exist. If one is consistent with marketing cash flow will continue and equity will grow. For a period of two months last year the average Class III futures price for 2009 was above $18.00 and reached a high of $20.59 by June. The difficulty faced by farmers at that point was projections for higher feed prices and anticipation of milk prices increasing to $25 or even $30 per cwt. Estimates were bullish because of the trend, and those analysts were doing a huge disservice to the industry. Common sense suggested consumers would not continue to purchase dairy products as heavily if prices continued to escalate. High prices cure high prices and this was clearly seen. The effect of higher prices was magnified by the falling domestic and world economies.

My current recommendation is to those who have extra grain to sell from their farm and those who would like to protect the worth of the crops they have planted. Purchase put options or put option spreads to protect against falling prices. I feel the market psychology is turning, similar to last year, and prices will erode. I recommend a December put option spread by purchasing a near the money put option and selling a put option with a strike price 70 cents below. For soybeans, use a similar strategy by purchasing a near the money put and selling a put $1.00 lower. This will protect the worth of your crop in the event prices decrease allowing you to still feed your crop.

Upcoming reports to watch for are the World Supply and Agricultural Demand report on June 10; the Export Sales report on June 10; the California Class I price on June 10; the May Monthly Milk Production report on June 18; the July Advanced Class I price; and the May Cold Storage report on June 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 subscribe.

 

 

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