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March 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.

Better Prices Spur Production – and Forward Thinking

Mar 19, 2010

By Robin Schmahl, AgDairy LLC

 

In recent years, markets have become more responsive to price because of the ability for production to change much quickly than before.

 

In the past, a trend change in the markets took awhile to unfold. Once the production train picked up steam, it took a while to slow it down. When milk supply was tight, it took some time for it turn the corner to bring the supply/demand balance back in line.

 

The same held true for grains and livestock. Obviously, cows can only calve once per year and it takes approximately two years to bring a heifer into the milking her. It seems, however, that a swing in the supply/demand balance can take place sooner than it once did. We do not have to look far to see evidence of this.

 

Last year was a tough year for producers with milk prices below the cost of production for much of the time. Cow culling increased as farmers needed to trim the herd to cut costs and provide some cash flow. CWT had a hand in the higher culling numbers, taking out approximately 252,405 head in the span of a year under their herd reduction program.

 

This, along with some improvement in the export market, began to support cheese and butter prices. This change translated into improving milk prices at the end of 2009 and a better price outlook for 2010. This was great to see as prices had been too low for too long.

 

As the price outlook turned brighter, however, so did the desire to push milk production and make up for lost income. More heifers already were waiting in the wings to be assumed into the milking herd. Many farmers began adding cows and pushing production in order to take advantage of the better prices.

 

This resulted in a faster turnaround in the market. Milk production in February increased 0.1% over last year. This may not sound like much, but it is the first time production increased over the previous month since July 2009. There were 3,000 cows added in February to the national milking herd and, for the second consecutive month, cow numbers increased. The milk production report showed production per cow 35 lbs. higher than a year ago.

 

February’s milk production report released last week showed a production decline in 10 of the top 23 states with five of those being Western states. Many Midwestern and Northeastern states posted increases in production over a year earlier.

 

The point is that farmers can react more quickly to prices than they did years ago. I know dairy farmers cannot change milk output simply by flipping a switch or cannot raise replacements on demand, but the production swing takes place more quickly.

 

Lending has a lot to do with the ability to make changes. There are lenders that are willing and/or requiring farmers to use the markets to hedge milk production and feed. They know that hedging a price that covers costs will allow bills and loans to be paid, and they are willing to set up marketing accounts. There are many lenders, however, who will not set up a marketing loan because they do not understand marketing, or have a directive to not lend any more money.

 

Now, I anticipate some discussion as to how a price can be hedged to cover costs. Near-term contracts do not offer this at the present time, but they did at one time. All you need to do is look back and see where these contract prices have been. For example, the March contract is currently trading at $12.80/cwt. It traded around $15.50 five times in 2009 and spent over four months above $18.00 in 2008.

 

Today, marketing requires forward thinking and not just focusing in the near-term. Profitability needs to be identified, and marketing plans and tools need to be implemented to protect those prices. The same is true for protecting feed prices.

 

Those who purchase feed should watch what is happening in the grain markets. The overall trend of grain prices is sideways to lower. Corn exports are slowing and soybean production is South America is regularly being revised higher.

 

I recommend purchasing feed needs in increments as prices decrease. If soybean meal prices fall below $260.00 per ton, some needs should be covered. Corn prices falling in the range of $3.70 per bushel basis the July contract should trigger a buy. The weather market is ahead and a lot can happen to spur price volatility.

 

Upcoming reports:

 

- February Cold Storage - March 22

- February Livestock Slaughter - March 26

- March Agricultural Prices - March 30

- Consumer Confidence - March 30

- Commercial Disappearance - March 30

- Dairy Products report - April 1

- California Class 4a/4b prices - April 1

- Fonterra Auction - April 1

- March class price - April 2

 

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

 

There Is Plenty to Go Around

Mar 08, 2010

By Robin Schmahl, AgDairy

 

The trend for cheese prices has not changed over the past weeks. Cheese prices have not found a bottom where buyers will step up to the plate and buy aggressively. Sellers feel the need to continue moving cheese to the market as soon as possible and not hold for a potential price increase later this year. Spot trading activity has been brisk as price continues to weaken. 

 

Block cheese price fell last week 4.5¢ to $1.29.75 with 10 loads traded. Barrel price dropped 4¢ to fall to $1.25 with 34 loads traded.

 

Seasonally, it would make sense that cheese prices should increase as the year progresses, but manufacturers are unwilling to pay storage costs only to discover that cheese prices may not increase enough to cover these costs. This does give the impression that manufacturers feel that there is little upside potential for cheese prices for the foreseeable future.

 

Obviously, this is a concern for farmers. Milk prices did get back to breakeven or perhaps some profitability over the past few months, but current futures contracts suggest a return to lower prices.

 

February class prices were announced, showing Class II increasing 43¢ to $15.65. Class III fell to $14.28, a decrease of 22¢, and Class IV dropped to $12.90, a decrease of 95¢.   

 

The impact of falling cheese prices during February is going to hit hard when the March prices are announced. March Class III futures are below $13.00 with the close at the end of the first week in March indicating the expectation of $12.89. The April contract closed at the same price as traders anticipated that plenty of cheese will be available for spring. Milk production is increasing seasonally and spring flush is drawing near.

 

This is a recipe for lower prices, especially with lower demand.

 

Like it or not, we will be facing lower prices over the next few months. I know we do not like to hear this, but the reality of this is staring us in the face.

 

Current stocks, supply and demand are in a position that will limit upside price potential. Regional nonfat dry milk and dry whey prices are weakening as a result of heavier cheese production and nonfat dry milk production. Extra milk has been moving to dryers, satisfying demand and then some.

 

International prices are mixed with Fonterra’s latest auction, showing a slight improvement for the whole milk powder price after declining the previous two months. Price increased to $1.49, an increase of 0.8%. Anhydrous milkfat price fell to $1.80, a decline of 12.8%. Skim milk powder was added to the auction this month with a weighted average price of $1.33 per pound.

 

Commercial disappearance of dairy products fell 1.2% to 190.4 billion pounds in 2009. American cheese disappearance rose 2.6%, other cheese was up 1.7%, while fluid milk products increased 1.1%. Butter disappearance was down 8.1% while nonfat dry milk was down 5.9%.

 

USDA anticipates commercial disappearance to increase this year, but we will need some help from the economy. Disposable income is tight and will limit demand growth.  

 

Upcoming reports to watch for:

 

The World Agricultural Supply and Demand report - March 10

The Crop Production report - March 10

The Monthly Milk Production report - March 18

 

 

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 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

 

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Traders Show Less Optimism for 2010

Mar 01, 2010

by Robin Schmahl                  

 

Milk futures have lost what was gained. In fact, all contracts in 2010 have made new contracts lows without a bottom is sight. Of course, these are futures contracts and not necessarily the prices we may see. However, futures prices have fallen due to declining cheese prices.

 

Cheese production for 2009 was a record high with 10.1 billion pounds produced, an increase of 1.7% from the previous year. There have been 18 years of steady growth in cheese production. Slower demand is definitely having an impact on prices.

 

Cheese prices are falling from increasing inventory, leaving cheese readily available to buyers. In fact, total cheese stocks for January were just shy of 1 billion pounds. Some buyers have been purchasing as prices decline and storing it for later in the year. The longer it remains a buyer’s market, the less likely the chance of a significant price increase. This inventory needs to decrease before higher prices will unfold.

 

Many had been anticipating a tightening milk market due to a year of low prices. Higher culling rates as well as a few CWT herd reduction programs have not had the impact hoped for.

 

Farmers usually respond to higher prices, and some recent reports indicate this. Cow numbers on the January monthly milk production report showed an increase of 3,000 head, the first month-over-month increase since December 2008. Dairy cattle slaughter for January showed 49,000 less cows slaughtered versus one year ago.

 

I have stated before that there is a lot of finger pointing and blaming going around. One reason, and likely the main reason, we are experiencing these prolonged low prices is the economy. Very few of us have lived through an economic situation such as we have now.

 

Sadly, it does not seem to be getting better and certainly will take much longer than many analysts have anticipated. The latest Consumer Confidence Index fell much greater than expected. The index was expected to decline slightly, but it unexpectedly fell 11 points to an index of 46.0. There were three months of improvement, but that has been eliminated and then some. The Conference Board Consumer Research Center pointed out that the combination of earnings and job anxieties will likely curb spending.

 

On the bright side, exports have been increasing after a year of being depressed. World demand has been slowly increasing, resulting in more interest in our products from other countries. The limiting factor to this is the recent increase in the value of the U.S. dollar. This has already resulted in some slowing of butter export interest. However, the overall outlook is indicating better export demand for 2010.

 

Upcoming reports to watch:

 

-          Dairy Products report - March 2

-          Fonterra auction - March 2

-          February class price - March 5

-          World Supply and Demand report - March 10

-          Fluid milk sales - March 12

 

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.

 

This column is part of the Dairy Today eUpdate newsletter, which is delivered free to your inbox every Tuesday morning. Dairy Today eUpdate provides the latest in dairy markets, policy, management and production, and news. Click here to sign up.

 

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