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April 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.

Despite Pullback in Cheese Prices, Dairy Market Shows Signs of Improving

Apr 19, 2010

By Robin Schmahl

 

A recent move to the upside in cheese prices ran into a ceiling less than two weeks ago.

Buyers were unwilling to bid blocks higher than $1.51 or barrels higher than $1.45 1/2. Sellers held out as long as they could while waiting for prices to increase. Once sellers began to re-enter the market with more aggressiveness, buyers stepped back. Some cheese being held back from the market began to move toward the 30-day-old mark, after which it cannot be traded on the spot market unless it is specified as aged.

 

This wasn’t the only reason cheese prices began to fall. Orders began to fall off with some cancellations due to cheese prices increasing so quickly. Demand began to be affected. This demand was not necessarily from the consumer reducing purchases but more from the buyer standpoint.

 

Inventories have been increasing seasonally and remain at the highest level they have been since the mid 1980s. Buyers have been looking ahead and purchasing cheese fairly consistently during the past four months. They are building a product cushion to avoid being caught short during the higher demand period later this year.

 

So, when prices increase too much, they step back. They have extra product already on hand and will wait until prices weaken again. I know this appears to be market manipulation, but the fact of the matter is, this is business. Any of us would do the same.

 

In fact, many farmers do this with feed purchases. Feed will be purchased hand-to-mouth until prices drop enough to forward purchase for future months or for the year. This eliminates the need to purchase feed when prices increase and become more volatile. If you are a seller of grain or hay, you wait until price increases before you let go of some of your inventory.

 

There are some signs the dairy market is improving. A bottom has likely been established and milk prices should not fall lower than they already have. I know this is not much consolation right now especially since cheese prices and Class III milk prices have fallen below $13.00 again.

 

Probably one of the most-watched monthly events is the Fonterra Auction. This auction is held on the first Tuesday of each month trading Whole Milk Powder, Skim Milk Powder, and Anhydrous Milk Fat.

 

It gives an idea of world demand and world prices. In fact, other than daily spot trading, it is the only event that takes place which gives us the information almost immediately. All other reports in the dairy industry are generally one or two months behind, which is why it has become one of the most watched reports/events of the industry. The latest trading event resulted in the Whole Milk Powder price increasing 21% and the highest level it has been since August 2008, Skim Milk Powder price increased 25.5%, and Anhydrous Milk Fat price increased 21.9%.

 

This certainly indicates improved global demand and, although it does not directly impact what takes place on the daily CME spot market, better demand and higher world prices will impact domestic prices.

 

Another sign of improving demand is that of our exports. The latest report from the Foreign Agricultural Service indicates exports during the month of February improved over the same month a year ago. Exports of whey improved 29.4%, nonfat dry milk exports increased 21.9%, cheese and curd increased 16.6% with butter and milkfat exports up 19.3%. The level of exports remains lower than 2008, but this is certainly showing some light at the end of the tunnel.

 

Lest you think I am saying milk prices will be improving significantly soon, this may not be the case. There is still a large quantity of cheese in inventory which needs to be reduced. Inventory continues to increase monthly and will likely increase seasonally through June. There are nearly a billion pounds of cheese in inventory, a level last seen in 1984. This needs to be reduced and supply needs to tighten. This may not happen quickly with milk production steady and increasing over last year.

 

I have been promoting purchasing put options and fence positions for some time now as a strategy for price protection. Those who have implemented these positions have been rewarded with protecting a higher price for their milk.

 

I continue to recommend these positions each time futures move up significantly. Put options work well for closer months due to less time values, while fence positions work well for later months by utilizing time value to your benefit. Try to maintain at least a $1.50-$2.00 price spread between the put and call when using the fence.  

 

Upcoming reports to watch:

 

- Livestock, Dairy, and Poultry Outlook report on April 21

- March Cold Storage Report on April 22

- May Class I price announcement on April 23

- March Livestock Slaughter report on April 23

- Commercial Disappearance on April 27

- April class prices announced on April 30

- April Agricultural Prices report on April 30

 

 

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

 

Export Assistance – A Better Way to Go

Apr 01, 2010

by Robin Schmahl

AgDairy LLC              

 

Cheese prices have made a nice turn upward during the past two weeks, sending Class III milk futures significantly higher in a short period of time.

 

Traders have been waiting for a retracement in futures for quite some time. Contracts relentlessly declined as premium eroded out of the market, and steady cheese prices did not lend any support to the market. Fundamentals were bearish and buyers were cautious. Manufacturers wanted to move cheese to the market quickly and did not want to hold on to wait for a higher price.

 

As the calendar turned to spring, cheese prices began to rise. One buyer came to the spot market attempting to purchase some needed cheese and found no one willing to sell. This prompted aggressive bidding that pushed cheese prices higher on a daily basis. Futures traders jumped to liquidate their sold, or “short,” positions to minimize their exposure.

 

Milk futures increased as buying became aggressive. Contracts quickly added premium back into the market, pushing prices significantly higher than the underlying cash prices. Cheese prices need to continue to increase or Class III futures will settle back in line with cash.

 

Overall, the trade remains cautious. The cloud of large inventory hangs over the market and may limit upside price potential until this comes into balance. Inventory and cow numbers will need to decrease in order to tighten the milk and cheese supply. Of course, increasing demand will do wonders for tightening the market and sustaining higher prices.  

 

After more than a year of inactivity, Cooperatives Working Together (CWT) reactivated its export assistance program on March 18. So far, there have been sales of 2.1 million pounds of cheddar cheese to the Middle East.

 

I applaud the CWT for reactivating this. I have long thought more emphasis should be put on this program rather than the herd retirement program. Under the herd retirement program, killing cows is just that: killing cows. And, as we have seen in the past, the impact of this has been minimal.

 

Export assistance is a two-pronged approach. It increases exports of finished dairy products to other countries and hopefully minimizes inventory growth. It also sends our products to countries that normally purchase a limited amount, if any. This, in turn, could increase our market share as these buyers use our high-quality products.

 

Increasing market share should be the main goal of the dairy industry. I trust CWT will put more money and effort into the export assistance program.

 

One of the reasons I have not been an advocate of a supply management program is that I feel it will not work effectively unless imports are limited as well. If a quota system is implemented on milk production, and demand increases, buyers will turn to the import market to obtain the products they need. This will reduce our market share and keep prices in line with world prices anyway.

 

The dairy market is global and will need to compete globally. Yes, there is a system in place for quota imports, but there also is the ability to purchase high-tier dairy products. A higher price needs to be paid for these over-quota imports, but these have been willingly paid for in the past under certain circumstances.

 

For instance, butter imports in January, according to the Foreign Agricultural Service were 1.1 million pounds, double the amount a year earlier. High Tier imports (above quota with a penalty) were 15.4% higher compared to a year earlier.

 

We certainly do not want to limit our ability to produce milk while at the same time Europe and New Zealand are attempting to establish dairy futures markets and move to a free market system without production quotas. (All countries struggled last year with low milk prices even though a quota was in place in some of them.) This would be a move in the wrong direction.

 

Upcoming reports:

 

·                     World Agricultural Supply and Demand report - April 9

·                     California Class I price - April 12

·                     March Monthly Milk Production report - April 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 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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