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July 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.

Year-Over-Year Milk Production Declines

Jul 20, 2009

By Robin Schmahl


There may be some indications that six months of low milk price is having an impact on the oversupply of the market. Three of the past six months were in the $10.00 range, and three months were in the $9.00 range.

During that time production remained relatively strong posting year-over-year increases. However, the 5-year streak of higher production has come to an end. The June Milk Production report showed a decrease of 0.1 percent for the top 23 states and a decrease of 0.2%for the U.S. Although this does not seem like much, it was the first decline since mid-2004.

Surprisingly, the June decrease in production was less than expected. June was when most of the 101,040 cows were eliminated under the seventh CWT herd retirement. This did not have an impact on milk prices for June, but it did have an impact on cow numbers. The dairy herd in the country decreased 34,000 head from the previous month while losing 86,000 head from a year earlier. One would have thought milk production would have shown a greater decrease. However, production per cow increased 13 lb./head from a year ago.

From what I am hearing in the country the next production report will likely see a large drop in production. Many farmers have cut back dramatically on cow numbers, types of feed they purchase, and have even been selling some replacement heifers to try and keep afloat. The recent jump of cheese prices, back above support, has provided some hope that higher prices may be coming in the near future. The amount of cheese in inventory is concerning, at highest amount since 1984, and indicates that price will have a difficult time increasing significantly until this inventory is reduced.

Another round of the CWT herd retirement program was implemented July 10, with bids being accepted through July 24. No indication was given as to the expected amount of cows to be eliminated, but a cap of $5.25/cwt.  was put on bids. I am assuming any bid meeting that criteria will be accepted unless the available money is used up.

Summer weather has resulted in lower component values and decreased cheese yield. This should slow the amount of cheese production and volume moving to storage. Typically, inventory should decrease in July and continue to do so through the end of the year. If stocks continue to increase into or through the third quarter, then the hand writing is on the wall and we will not see much price strength through the end of the year.

Class III futures contracts in 2010 have rallied notably over the past two weeks which is getting me to sit up and take notice. Earlier, I had recommended that fence positions should be established if contracts in 2010 were to rally a dollar. That time has come.

I know it is difficult to step in and potentially limit upside price potential, but the goal is to achieve a level above the cost of production and begin this on some percentage of your production. A fence positions consists of the purchase of a put and the sale of a call which establishes a floor and a ceiling. This should be done at a $2.00 spread. If the milk price were to rally you may limit your upside to between $16 and $17 for a Class III price with premiums on top of that depending on where you are and your component values. I know there is a good possibility of some upside price potential, but the goal is to manage risk and risk is to the downside if you are producing milk. A follow-up strategy can be implemented after these are established if and when they need to be to.

Upcoming reports to watch for are the June Cold Storage report on July 22; the June Livestock Slaughter report on July 23; Commercial disappearance on July 28; July federal order class price on July 31; the July Agricultural Prices report on July 31; and the California 4a and 4b prices on August 3.

--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.

 

 

Only the Strong Will Survive

Jul 06, 2009

By Robin Schmahl

Who will remain in the dairy business and who will go may be decided by the end of the year. The competition is fierce, and the mindset is that farmers will continue until all equity and borrowing capacity is exhausted, at which time they will be forced out of business.

Each farmer hopes the other will blink first, eventually causing significant tightening of the milk supply, which could increase prices to profitable if not record levels. Any way you look at it, dairy farmers will be bruised and battered when this is all over. Farmers have been culling aggressively, but many tell me they have sufficient heifers waiting in the wings. Culling standards are higher, heifers are being brought in and milk production continues to increase.

In case you think this is a ploy of co-ops or manufacturers to keep prices low, it is not. It is not a matter of an explosion over the past year of milk production or cow numbers. It is not a matter of people turning away from dairy products in their diets. It is not a matter of retail prices being so high that consumers have turned to alternative foods. It is simply a matter of the current world economic situation. Farmers around the world are struggling with low milk prices with riots and protests breaking out in other countries. Consumers have curtailed their spending on dairy products as well as other goods and services. It is difficult for almost every business in the current economic crisis. All we need to do is look at how each one of us has changed in our purchasing habits over the past year and it is plainly seen.

It is difficult to keep a positive outlook at the present time, but there will be a brighter future. However, there is no indication as to how long these low milk prices will continue before moving higher. Grain prices looked bleak late last year with many indicating that they would not plant corn due to high fertilizer prices and low corn prices. The market changed quickly at the beginning of the year with corn price increasing to profitable level resulting in the second highest corn acres ever planted. The USDA reported 87.04 million acres were planted, the most since 1946. When profitability is realized, farmers respond. However, those who planted because of profitable prices and did not take steps to hedge a profitable price have missed the boat. In the past month, corn price has fallen nearly a dollar per bushel. I dare say it is now below many grain producers cost of production. Soybean costs are not quite as high as corn, but price has also eroded nearly a dollar per bushel. A record 77.48 million acres have been planted and a profitable price is slipping away as well. This is good news for those who purchase their feed and bad news for those who sell their grain.

The market will always move unexpectedly and we need to be prepared to take advantage of it when opportunities exist. I think there will be a milk futures price rebound in 2010 contracts sometime in the second half of this year. A rebound of 50 cents would put contract prices back up near contract highs and a level at which some hedge strategies could be implemented. I know a $16.00 Class III price leaves much to be desired after a prolonged period of low milk prices, but this would mean $17.00 to $18.00 or more in your mailbox. A fence strategy could net you even more upside price potential while at the same time protecting your downside.

The key to improving milk prices will be an improving economy both domestically and world-wide. However, there is not much sign of this improving anytime soon. The cry for eliminating a massive amount of cows in order to tighten milk supply and thereby improve prices is not the answer. If domestic dairy prices are forced higher while world prices remain low, imports will come in. History has shown us this many times and will repeat itself again. The result of this would be the loss of market share as cow numbers would be lower while overall prices would not show much improvement. The dairy industry is competing on the world stage. Like it or not, the rules have changed.

Upcoming reports to watch for are the World Agricultural Supply and Demand report on July 10; fluid milk sales on July 10, California Class I price on July 10; and the June Monthly Milk Production report on July 17.

--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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