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September 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.

Demand Improving but Inventory is Large

Sep 25, 2009

By Robin Schmahl

A recent increase in cheese prices has been a welcomed sight for dairy producers. The question is whether there will be enough buyer interest, stemming from increasing demand, to continue to push prices higher. We know that something has got to give soon as milk prices cannot remain at these low levels without a significant shake-out of farmers. Right now, most are determined to stay in business until either milk prices improve or they are broke and forced out of business.

The USDA’s “Monthly Cold Storage” report for August indicated that it may be difficult to see milk prices increase very much through the end of the year. Inventory of American cheese totaled 621.5 million pounds, a decrease of 6.9 million pounds from the previous month, but 53.8 million pounds higher than a year ago. Stocks are at the highest level they have been since 1986. Historically, August inventory would decline significantly from July, but this decline was the smallest since1992. Total cheese inventory declined 2.7 million pounds from the previous month to the level of 985.3 million pounds, leaving stocks at the highest level since 1984.

Butter stocks surprised the trade by increasing 391,000 pounds in August to 263.2 million pounds, compared to the previous year. This increase solidifies the outlook for limited price potential to the upside. The last time August butter stocks increased was in 1990. This shows slower demand has had a large impact on supply. Demand is showing some signs of improvement with orders increasing for the end of the year demand. Manufacturing has been able to keep up with demand with limited dipping into inventory to fill orders. The pendulum should swing on this from now through the end of the year.

The USDA has indicated the desire to continue to use the increased cheese and nonfat dry milk support prices that were implemented on a temporary basis for August through October. However, this will require the allocation of additional funds. This is currently under consideration as well as the possibility of raising support prices even higher if the funding is made available. This will cause market uncertainty and volatility in the months ahead. I am not sure whether more government intervention will help or hinder the industry in the long-term. We all would like to see milk prices increase soon, but a band-aid approach may not be the best approach.

Many other countries around the world are also struggling with low milk prices and are searching for ways to improve prices. Again, short of dumping milk or manufactured product on a pile to rot, these products will be absorbed by consumers at some point in time.

The idea of the government purchasing dairy products is to take them off the market now in order to improve prices. Once prices improve from increased demand or less production these stocks will then be filtered back out to the marketplace. This will limit upside price potential for a longer period of time until supply and demand come back in balance, but will hopefully improve prices in the time being. It has been a tough year for dairy farmers.

Upcoming report to watch for are the September Agricultural Price report on September 29; the California 4a/4b prices on October 1; the September federal order class prices on October 2; the August Dairy Products report on October 2; the World Agricultural Supply and Demand report on October 9; and the California Class I price on October 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.

 

 

USDA Is Not Very Optimistic

Sep 14, 2009

By Robin Schmahl

Eight months of 2009 are already behind us, and so far profitability has been non-existent due to low milk prices. The Class III price has fluctuated from the low of $9.31/cwt. in February to the high of $11.20 in August with an average price of $10.29/cwt.

The all-milk price has ranged from $11.80 to $13.30. Anticipation for higher prices can be seen in Class III futures as each subsequent month is higher. Futures prices are certainly nothing to get overly exited about, but it is providing some hope that the worst may be behind us.

This year has again been a real lesson for how important marketing has become. Those who took advantage of significantly higher futures prices last year by hedging some of their production have been able to weather the storm well. The opportunities were there, but it is always difficult to pull the trigger. This decision was compounded due to the inability of many to secure feed contracts in order to lock in profitability, which brings us to another point. When feed contracts cannot be obtained or prices are exorbitant, you can turn to the options market to protect feed costs from increasing while leaving the bottom side open to take advantage of a lower price if prices fall.

I have been indicating that the time was near to hedge feed prices for next year and the time is now. A corn price near $3/bu. for the front-month contract is providing the opportunity to forward contract through a feed supplier, purchase call options, or purchase call option spreads for next year. Soybean meal falling to $275/ton on the futures market should trigger call option buying. I know there still remains a wide basis for meal, but the purchase of call options now to protect price and then contracting when basis come back to normal is a strategy that needs to be implemented.

Feed prices need to be protected in light of the latest USDA estimates for 2010 milk prices. Their latest estimate left the average Class III price for next year unchanged at the range of  $13.75-$14.75, Class IV price was lowered 15¢ to $11.95-$13.05 putting the estimated all-milk price at $14.55-$15.55, a decrease of 10¢/cwt. Of course, this will be better than the $12.15 average price expected for this year, but far short of what is needed to make up for lost income this year. The USDA also sees an increase of 200 million pounds to 186.7 billion lb. of milk production next year. The last thing we want to see is milk prices improving somewhat only to be offset by rising feed prices. Larger crops are expected than earlier this year, but corn carryout for this year is now expected to be 60 million bushels lower than the marketing year just ended. Soybean production has increased with a record crop expected to come in, but demand has been brisk which could limit a build-up in stocks. Be on guard as things can change quickly.

There is some thought cheese prices may increase into the end of this month as they may be some desire for cheese buyers to improve the value of their inventory. There is also the possibility that the USDA could increase the support price of cheese to $1.40 for blocks and $1.38 for barrels versus the $1.31 and $1.28 respectively. An increase in Class III futures for 2010 contracts of 50-75 ¢ needs to be taken advantage of to implement an option fence strategy buying a put and selling a call $2 apart.

Upcoming reports to watch for are the August Monthly Milk Production report on September 18, the Advanced October Class I milk price, the August Cold Storage report on September 22, the August Livestock Slaughter report on September 25, and the Agricultural Prices report on September 29.

--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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