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.
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