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July 2011 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.

Dairy May Be Following Other Markets More Closely

Jul 25, 2011

Volatility in cash cheese, butter and nonfat dry milk has been as unpredictable as the other commodity markets and weather over the past few weeks. Meanwhile, recent hot, humid weather has impacted U.S. milk production.

 
Volatility in cash cheese, butter and nonfat dry milk has been as unpredictable as the other commodity markets and weather over the past few weeks. One can clearly say there is no trend, unless perception and volatility is a trend.
 
One week we may see no outside influence on the dairy trade coming from the other markets, while the next seems to bring a strong correlation to what is taking place in the other markets influenced by both national and international events. Have we been global long enough and trading volume increased enough in the dairy complex to bring in more traders? Volatility usually brings more trading activity.
 
This past week has increased concern over the impact hot, humid weather was having on milk production. California went through a bout of hot weather earlier, which has since tempered. The Plains, Midwest and Northeast were the recipients of an event dubbed the “Dome of Gloom,” with the hottest weather experienced in years.
 
Concern erupted over the stage of the corn crop as many stated this was right during pollination. Stories of yield losses circulated. However, further analysis indicated much of the corn crop may have benefited from the heat. The nation’s corn crop, according to the weekly Crop Progress report, indicated the crop was about a week behind. Furthermore, the resulting heat units were beneficial to late planted crops. There is no doubt some of the corn crop was affected. It will be difficult to tell the impact until harvesting is done.
 
The more direct impact for the dairy industry was the significant decrease seen in milk production. Farmers tried their best to keep cows comfortable and alive. There have been numerous reports of cow deaths due to the intense heat and humidity. Milk receipts in many areas were down 10% or more along with reduced components. The heat spell was long enough in duration to make in difficult for cows to regain their production capability once the weather tempers.
 
Lower milk output seems to have caught the attention of cash buyers, especially in block cheese. Less than two weeks ago, the price was declining, reaching below $2.00. However, it was only for a brief period of time. Buyers were aggressive last week, pushing the block cheese price to the highest level in three years. This buying and reluctance of selling seems to stem from the idea that production will tighten at a time when buying interest and demand generally increases.
 
Current cheese prices, although welcomed by dairy producers, may be a little precarious. Although the June inventory of American cheese showed a decline of 2.8 million pounds from May and 8.0 million pounds below a year earlier, total cheese stocks increased 3.0 million pounds from May and 13.0 million pound above a year ago. This in itself does not seem like a big deal and is not necessarily bullish or bearish to the market. However, the comparison that makes the market a bit suspect is the comparison of price and stocks three years ago when cheese prices were this high.
 
American cheese inventory in June 2007 was 565.9 million pounds versus the recently released June inventory this year of 619.0 million pounds. Total cheese stocks in June 2007 were 891.2 million pound while June 2011 was 1.051 billion pounds. Looking at these numbers, it would suggest price should not be this high, but there is a fear that tighter supply with good demand will decrease stocks significantly.
 
Consumer demand will be the key. The purpose of high prices is to cure high prices. If demand slows and supply begins to build, prices will need to decline. If seasonal demand remains strong and buyers want fresh cheese, it will not make any difference what inventory is for the next few months.
 
My recommendation is to use put options for closer months to establish some nice floor prices. Initiate fence strategies for later months for maximum downside protection while still allowing for the ability to captures some upside to the sold call option strike price. A put option spread is another method if you do not want to be involved in potentially having to pay margin if prices increase. Put option spreads will limit downside protection, but it is better than doing nothing.  
 
Upcoming reports:
 
-          July Agricultural Prices report on July 29
-          Dairy Products report on August 1
-          California 4a/4b prices on August 1
-          Fonterra auction on August 2
-          July federal order class prices on August 5
-          California Class I price on August 10
 
 
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.

Feed Price Outlook Improves After Acreage Report

Jul 11, 2011

Feed prices for this year have been a real concern for dairy operations. Corn prices moved up consistently from November through March making very few price corrections. Since then the market has been very volatile with significant declines followed by new contract highs. Demand was the initial driver while weather took over as planting season unfolded. Delayed planting and flooding resulted in new price highs. Tight ending stocks and the projection for fewer acres than needed spurred buying interest in futures contracts.

USDA released their “Planted Acreage” report June 30 which changed the market tone immediately. While the trade was anticipating planted acreage to be 90.78 million acres, USDA came out with a shocker and indicated plantings at 92.3 million acres – slight over 100,000 more acres than the March report. This stuck the proverbial “fork” in the market resulting in frenzied selling sweeping through the grain complex. September futures fell 71 cents over the next two days following the report. Since June 10, the date of the World Agricultural Supply and Demand report, September corn futures fell $1.49 per bushel into the closing bell on Friday, July 1.

Soybean planted acreage on the same report was the opposite showing a decrease of 1.4 million acres from the March report to a planted acreage of 75.2 million. Despite the bullishness of this report, future initially fell in sympathy with corn, but not to the same extent. In fact, since the World Agricultural Supply and Demand report on June 10, soybean futures fell 70 cents per bushel by July 1.

This was good news for dairy producers as the outlook for lower feed prices became brighter. Buyers of feed were ecstatic that analysts and others who were calling for $10.00 per bushel corn or higher were wrong – at least for the time being.  

Lest we be comfortable with the setback in price, remember that there is a lot of the growing season to go through. Pollination will be critical and there is always the threat of an early frost. USDA will also resurvey planted acreage in South Dakota, North Dakota, Montana, and Minnesota with updated planted acreage to be released on the World Agricultural Supply and Demand report scheduled to be released on August 11.

On the other hand, milk prices continue to increase. The June federal order Class III price was announced at $19.11, up $2.59 from May and $5.49 from a year earlier. Traders are projecting a July Class III price of $20.94 at the time of this writing. If realized, this would be the highest price since July 2007 and $7.16 over a year earlier. This sounds real good but remember the milk/feed ratio has changed very little over the past year. September corn price a year ago was $3.85. In essence, we are trading dollars for dollars.

The bottom line is that you need to be proactive and take advantage of the decline in grain prices to hedge feed prices. Forward contract some of your feed needs if your supplier is offering that as an option. Otherwise, use the markets to protect against higher prices.

My recommendation is to use option contracts for December corn and November soybeans or soybean meal. This will allow you to leave the bottom open in case lower prices were to unfold. Call option spreads are the preferred strategy due to increase option value from volatility. Purchase a December at-the-money calls while at the same time selling call options 70-80 cents higher. These can be done for about 25 cents. This strategy requires only the difference in premium of the options to be paid. Upside protection will be realized until the strike price of the sold call option. A follow up strategy will need to be initiated if price move higher than the sold call option.

Soybeans and soybean meal call spread will follow the same principle only with different premiums and different strike prices.

Do not be complacent over the fact that more corn acres have been planted which will keep prices in check. The trade is already taking about a possible high pressure ridge forming over the Midwest by mid-July. An adjustment in planted acres in August could send us off to the races again.

Upcoming reports:

  • World Agricultural Supply and Demand report on July 12
  • Fluid milk sales on July 15
  • June Milk Production report on July 19
  • Fonterra auction on July 19
  • August Class I price on July 22
  • June Livestock Slaughter report on July 22
  • June Monthly Cold Storage report on July 22
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