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January 2010 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.

Exports Are Increasing

Jan 18, 2010

by Robin Schmahl

After falling steadily for nearly a month, Class III futures finally reached bottom and have rebounded nicely. The end of 2009 renewed a bearish attitude in the market but has since given way to a more positive outlook. Strengthening cash markets caused the turn-around as traders felt a bottom has been set

 

After a nearly record wide block/barrel spread in December, the spread corrected quickly and has now inverted with barrel price higher than blocks. This has become more common over the past few years with the market more comfortable with these swings. In the past, the block/barrel spread remained fairly close with few aberrations. However, this spread is more responsive and is a representation of current fundamentals. There does not seem to be as much of an effort to maintain the normal spread of 3¢ to 4¢ between the block and barrel price.

 

Buying interest in butter has increased over the past week with buyers becoming more aggressive. Churning activity increased over the holidays but has since slowed due to less available cream. Demand is being met with excess moving to storage for later use. Unlike cheese which will age, butter can be frozen and later brought out to meet demand retaining the same consistency.

 

There is an underlying fear that milk supply will tighten significantly during the year and buyers are willing to build inventory at this price. Spot price and futures have responded to this aggressive buying by increasing 18¢ last week reaching the highest price since Dec. 1. Export interest has been increasing with November butterfat exports totaling 13.7 million pounds, an increase of 59% over a year ago. Butterfat exports have been trending higher over the past four months after spending nearly a year in the doldrums. Even though overall butter exports for the period on January-November 2009 were down 72% from a year earlier, the future is looking brighter. Some manufacturers have increased churning of 82% butter for the export market in anticipation of further demand.

 

Many times butter is the indicator of the price direction and strength of cheese. If this holds true, higher cheese prices may follow soon. However, cheese inventory is large and has reached the time of year during which there is a seasonal increase of stocks. Unless demand picks up dramatically or production fall significantly, these high supplies will have an impact on price strength. November cheese exports increased 13% with whey protein exports up 47%, indicating improving demand.

 

The latest World Agricultural Supply and Demand report caught many traders off guard but was a welcomed report for feed buyers. USDA reported record corn and soybean production in 2009 despite weather challenges during the year. Corn production totaled 13.151 billion bushels with a soybean production of 3.361 billion bushels. This report generated a lot of questions that will remain until the USDA updates these numbers on the March 10 report after more time has elapsed and harvest is (hopefully) complete.  Since the report, corn price has fallen around 50¢ per bushel, soybeans fell 36¢, and soybean meal has fallen about $5.00/ton. The retracement in prices that I have been expecting is now taking place and will give opportunity to hedge feed prices for the year.  

 

Upcoming reports to watch for are:

-          the December Milk Production report on Jan. 19

-          the December Livestock Slaughter report on Jan. 22

-          the February Class I price on Jan. 22

-          the December Cold Storage report on Jan. 22

-          Commercial disappearance on Jan. 26

-          the bi-annual Cattle Inventory report on Jan. 29

-          the January Agricultural Prices report on Jan. 29

-          the California 4a/4b prices on Feb. 1

 

-    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 website 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 my not be suitable for everyone. Those acting on this information are responsible for their own actions.

 

Higher Milk Prices Expected in 2010

Jan 04, 2010

By Robin Schmahl

A new year is before us, and hopes are high that it will be better than 2009. Working hard to produce good quality milk demanded by the consumer, only to end up with less money than when we started, is a difficult way to make a living.

This is not the fault of the consumer and it is not the fault of the industry but the result of a slowed world economic situation resulting in lower demand. I know there has been a lot of finger-pointing going on to try to place the blame. There have also been a lot of ideas of how to fix milk prices. We can be confident in saying that improved export demand and improved domestic consumer demand will go a long way to fix low milk prices.

December Federal Order class prices were released on the final day of the year and were the highest prices of the year:

-The Class II price for December is $14.25/cwt., an increase of $1.01 from November
-Class III is $14.98, an increase of $0.90
-Class IV was $15.01, an increase of $1.76
 

These prices certainly are welcomed but seemingly short-lived. The weakness in cheese has quickly turned futures prices lower. Traders currently feel January Class III futures may be about $14.22, down about 60 cents from the middle of December. February futures have now fallen below $14.00 and the lowest futures price it has been since early September.  We should not be surprised with this. After all, the November cold storage report indicated an unprecedented increase in American cheese stocks.

In records dating back to 1980, this is the first time November stocks were higher than October. The aggressive purchasing that took place over the past few months by two main buyers was for the purpose of filling orders but also for the purpose of building stocks as a hedge against potential rising prices during the year. Block cheese price was expected to decline once buyers became less aggressive and manufacturers wanted to reduce inventory through the end of the year. Those who have purchased put options and/or implemented fence strategies, as previously recommended, have their downside protected, putting themselves in a much better financial position.   

A higher average milk price for 2010 certainly provides us with hope. Along with this is a better milk/feed ratio. The ratio for December climbed to 2.38, the highest ratio since January 2008. Grain and hay prices remained relatively stable the past few months while milk price has been improving.

This still is not a very good ratio, but one that provides some underlying support for a potential better ratio later, getting milk prices back to breakeven at least. The problem we are facing this year is that a great milk price is needed to get back on track to improving equity.

Numerous positive things have happened in the dairy industry over the past year, but low milk prices overshadowed them all. The Class III price average for 2009 was $11.36, nearly matching the 2003 average. Currently, the USDA estimates a Class III price average in 2010 of $15.55 and an all-milk price of $16.75. We can only hope this will be achieved and then some.

The current marketing recommendation is to hold off on contracting any more feed for this year. The market is setting up for a price retracement in grains. Wait for this price retracement before establishing further feed price protection.

Upcoming reports to watch for are:

- the California Class I price announcement on Jan. 11
- the World Agricultural Supply and Demand report on Jan. 12
- the December Milk Production report on Jan. 19
 

--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 sign up.

 

 

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