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September 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.

Lower Grain Prices Provide Window of Opportunity

Sep 19, 2011

The downward trend in grain prices should be viewed as a gift for hedging feed prices. The volatility in grain is not going to go away this year or next.

 

Cheese markets have not been very exciting over the past month, with prices for both blocks and barrels remaining in the $1.70s range. Class III futures contracts through December have settled down considerably from their previous volatility. First-half 2012 contracts have virtually traded sideways while later contracts slowly creep higher.

Previous projections from some analysts for continued high milk prices due to high feed prices have fallen by the wayside. With milk supply and manufacturing sufficient to meet current demand, it appears cheese prices will remain in this range for some time. Increasing milk production is enough to satisfy school milk demand as well as fall manufactured product demand. Seasonally, this is the time when buyer interest is heavy. Orders for the end of the year are being placed, and inventory is dipped into to supplement fresh manufactured supply.

Buyers are not concerned over supply at the present time. Demand has improved with lower cheese prices, but it has not improved as much as was anticipated. Cow numbers continue to increase and are expected to increase further. The latest monthly dairy cow slaughter report showed the lowest slaughter since June 2008. Higher milk prices increase the desire to produce more milk despite higher feed prices.

Grain prices appear to have made a top and are trending lower as harvest approaches. USDA reduced corn production on its latest World Agricultural Supply and Demand Estimates (WASDE) report last week, to 12.497 billion bushels. Despite expected production being down significantly from earlier estimates, the current expectation is still 50 million bushels higher than last year. It certainly was a good thing more acres were planted this year.

Soybean production was raised 29 million bushels to 3.085 billion bushels. However, this number is 244 million bushels lower than last year. This report has not been enough to stop the current liquidation phase taking place in grain futures.

The lower trend in grain prices needs to be watched closely for an opportunity to hedge feed prices, either through a forward contract or with call options or call option spreads. The balance sheet for supply and demand for grain is tight. The current trend lower in grain prices should be viewed as a gift and opportunity. Purchase $7.00 March corn call options and sell $7.70 call options for a spread price of 25 cents. If prices fall further, scale in and purchase more feed coverage with the same strategy at lower strike prices. The volatility in grain is not going to go away this year as well as next year.

USDA did not change its price outlook for milk and dairy product prices for 2012 on the WASDE report released last week. The All-Milk price range remained at $17.80 to $18.80. The cheese price is estimated to range from $1.67 to $1.77, with butter in the range of $1.6150 to $1.7450. Of course, this can change significantly, but right now Class III futures are in line with expected prices. The best strategy for now is to focus on protecting feed and to see how dairy prices react as the calendar moves toward the holidays.

Upcoming reports:

- August Cold Storage report on Sept. 22
- August Livestock Slaughter on Sept. 23
- Advanced Class I price on Sept. 23
- Commercial disappearance on Sept. 27
- Agricultural Prices report on Sept. 29
- September Federal Order class prices on Sept. 30
- California 4a/4b prices on Oct. 3
- Dairy Products report on Oct. 3

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He can be reached at 877-256-3253 or through the 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 trading may not be suitable for everyone. Those acting on this information are responsible for their own actions.
 

Flavored Milk Discontinued in Schools for the Wrong Reason

Sep 02, 2011

As the market approaches a pullback, overall milk demand for school systems this year may suffer somewhat.
 

Cheese prices falling 42 cents during August sent a resounding statement to the market. Milk production was strong enough and cheese supplies sufficient enough to put to rest any fears of tight supply. Buyers are content with prices in the $1.70’s for the time being. They purchase what comes to the spot market without feeling the need to push prices higher in order to shake loose some supply, despite the time of year.
 
More milk has been diverted to bottling to meet the demand of school systems, leaving less milk available for manufacturing. Milk production in July was affected by hot weather, but overall still posted an increase over the previous year, albeit the least amount of growth so far this year. August may not be much better due to lingering hot weather in some areas as well as a slow rebound in milk production.
 
Despite reduced production, overall demand for school systems this year may suffer somewhat. Some school systems have opted to discontinue offering chocolate milk, or any flavored milk, to students. Flavored milk is being discontinued due sugar content and the push to limit childhood obesity.
 
Studies have shown that when only white milk is offered in the school system, total milk consumption declined 35%. This is not only for a short period of time, but even after the study was done over more than a year. Information from the School of Psychology & Sports Sciences from Northumbria University indicates chocolate milk outperforms two major sports drinks for recovery after strenuous exercise. Furthermore, comparing 8 oz. of 1% chocolate milk to the same amount of 2% white milk and juice drinks, we see some interesting statistics in sugar content between these drinks.
 
Sugar content is the main issue here with the push to fight childhood obesity. Eight ounces of 1% chocolate milk contain 25 grams of sugar, and 8 oz. of 2% while milk contain 12 grams of sugar, while four of the more popular juice drinks contain higher levels of sugar per volume. Capri-Sun contains 26.4 grams sugar for 8 oz., Sunny D contains 30 grams, Kool-aid contains 29.6 grams, and Apple Juice contains 25.6 grams. 
 
The bottom line here is if milk consumption declines due to children only having the choice of white milk, they will drink something else. Other products may have some nutritional value, but may also contain higher sugar content, which is what the discontinuing of chocolate milk consumption is all about. A website containing a wealth of downloadable information is www.milkdelivers.org
 
July was an interesting month as far as output of milk was concerned. Milk production was up 0.7% over July 2010. Cheese stocks for the month increased 34.9 million pounds or 3.0%, but cheese production decreased 2.0%. This indicates demand was affected by cheese prices over $2.00, and eventually price had to come down to stimulate demand. Demand so far has not been stimulated as much as anticipated even with prices at current lower prices. Weekly cold storage reports from selected storage centers indicate the potential for cheese stocks to post another increase for August. 
 
USDA announced a Class III price of $21.67 for August -– a record high. Milk futures indicate that this will be the peak for the year, with subsequent months showing lower prices through April 2012. High milk prices have spurred the desire to produce more milk, as they always do. Cows are being added to the herd while at the same time culling has slowed. Dairy cattle slaughter in July totaled 207,000 head, the lowest since June 2008. Even with high feed prices, the desire is to increase production to receive a bigger milk check. 
 
Upcoming reports:
 
-          Fonterra auction on September 6
-          California Class I price on September 9
-          World Agricultural Supply and Demand report on September 12
-          Fluid milk sales on September 16
-          August milk production report on September 19
-          Fonterra auction on September 20
 
 
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.

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