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October 2012 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.

Will High Cheese Prices Be Maintained?

Oct 26, 2012

Schmahl looks at the impact of recent prices on exports, the reality of feed costs and the outlook for U.S. milk production.

Much to the dismay of dairy farmers, cash prices have had difficulty maintaining upward momentum. In fact, it appears cheese and butter prices may have established a top for the rest of this year. The higher prices reached about a month ago and again recently are having an impact on export demand. Not that this was the only determining factor, but it also corresponded with the time of year in which price historically reached a peak.

Another limiting factor may be prices on the Global Dairy Trade (GDT) auctions. For example, the Cheddar cheese price on the bi-monthly GDT auction over the past 12 months has ranged from about $1.30 to $1.70 per pound, with the latest auction results posting a price of $1.36 per pound. This price does not correlate very closely to U.S. milk prices.

The highest GDT price over the past 12 months was posted in January when the Class III price was $17.05. The lowest GDT Cheddar cheese prices took place in May when the U.S. price was $15.23. The September Class III price was $19.00, with October futures indicating a price of nearly $21.00. We can see there is no direct correlation, but an overall steady global price will limit upside potential for U.S. price. Higher domestic prices usually increase imports. According to the latest Foreign Agricultural Statistic Service data, quota imports of cheese for the first nine months of this year totaled 121.0 million pounds, up 6.0% over the same period a year ago. Imports of High-Tier cheese (imports above quota with a penalty) for the same period of time stand at 19.5 million pounds, up 7.5%.

All dairy farmers would like higher milk prices, and if not higher milk prices, then lower feed prices. It certainly does not look as if significantly lower feed prices will be realized over the next year unless things change fundamentally. Corn exports have been slow along with reduced domestic consumption. The price, however still remains historically high. The alfalfa hay price averaged $205 per ton on USDA’s September “Agricultural Prices” report. This is not too much different than last year at this time when price was $198. However, the price is expected to increase as the calendar moves forward. The concern is that there may be a shortage of good quality hay by the time first crop can be harvested next year.

High feed prices will impact global dairy expansion, according to the International Farm Comparison Network (IFCN). They estimate farmers’ costs will increase 5% this year. This could be higher as the report (www.ifcndairy.org) did not factor in the effect of the U.S. drought on grain crops. The total impact may not be realized for some time. The IFCN predicted last year that worldwide demand for dairy products would outpace supply, indicating that “it would take one New Zealand a year” to fill the production gap – the equivalent of 18.9 million tonnes.

U.S. milk production is declining, with September production posting the second consecutive year-over-year decline. Production in all 50 states declined 0.5%. Cow numbers fell 6,000 head below a year ago and mark the first year-over-year decline of cow numbers since August 2010. It appears milk production will decline most, if not all, of next year. There will likely be further herd reductions as the year progresses and feed prices remain high. If a new farm bill or farm bill extension is not implemented soon, there could be a significant increase on farm liquidations over the next few months, which would significantly tighten milk supply.

My current hedging recommendations are to purchase call options for 50% of soybean meal needs through July. Purchase March $460.00 call options for a premium of $20.00. Purchase May and July $450.00 call options for a premium of $20.00. Set targets to hedge some milk if January through March Class III futures reach $20.00.

Upcoming reports:

- Federal Order class prices on Oct. 31
- Agricultural Prices report on Oct. 31
- September Dairy Products report on Nov. 1
- Global Dairy Trade auction on Nov. 6
- Dairy exports on Nov. 8
- World Agricultural Supply and Demand report on Nov. 9

 


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. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Those acting on this information are responsible for their own actions.
 

Higher Milk Production in 2013?

Oct 15, 2012

Higher dairy prices are expected to boost milk output, but questions about next year’s supply remain.

It certainly is going to be a difficult year for dairy farmers. There has been a significant amount of farm foreclosures and liquidations due to the inability of those operations to cash flow. Some are selling out because they are just tired of working hard and still losing money.

Whatever the reason, many of those cows are going to slaughter. Not many dairy farmers want to take on more mouths to feed at a time when feed prices are high and profitability non-existent. Cow numbers have been declining but still remain higher than a year ago. This is expected to fall below year-earlier levels over the next few months. The unknown is how many heifers will come into herds to replace those that have been culled. Farmers may be unwilling to sell good heifers for slaughter or for a significantly reduced price and may do what they need to do to hold onto those animals and improve genetics.

USDA anticipates higher milk prices in 2013, resulting in greater milk production. On its recent World Agricultural Supply and Demand (WASDE) report, USDA increased the milk production estimate 800 million pounds to 199.7 billion pounds. If this production is realized, it would be slightly higher than expected production for this year. This seems a bit of a stretch given current market conditions. Bottlers and manufacturers are comfortable with milk supplies through the end of the year.

But there is much speculation as to milk supply next year. Reduced cow numbers as well as the effects of delayed conceptions resulting from the prolonged hot weather will be evident next year. If grain prices continue to decline and culling slows, milk production may stabilize. Increasing cow numbers nationwide is something that is not expected to happen over the next year. It will likely take until the harvest of first-crop hay before farmers may breathe a little easier, but it will take until grain harvest next fall before supply will not be as tight, that is if weather is good and crops grow and mature properly.

Milk price estimates were increased across the board on the WASDE report. The 2012 Class III price was raised an average of 75 cents to $17.60 while the 2013 price was raised $1.00 to $18.20. This would be the second highest Class III average price if it comes to fruition, with the highest being in 2011. Class IV was raised 50 cents to an average of $16.10 this year and up 85 cents at $17.25 next year. The All-Milk price average was raised 65 cents to $18.55 while next year’s price was raised $1.10 to $19.45.

Dairy exports for August were mixed. Exports of cheese and curd totaled 20,123 metric tons, up 30% from a year ago, according to USDA/FAS trade data. NDM/SMP increased 17.1%. Whey declined 0.6%. Fluid milk and cream declined 24.2%, and butter fell 49.2%. Butter exports have been struggling. During the first eight months of this year, only May showed higher exports than the previous year. In fact, it was the only month showing positive exports since June 2011.

The combination of strong domestic demand and assistance from Cooperatives Working Together has been enough to keep price in close proximity to cheese. Handlers are not too concerned over tight supply through the end of the year. In another month, aggressive buying for the holidays will be mostly complete. Fill-in supplies will always be needed and easily met. Stocks are expected to finish the year higher than the end of 2011. However, this will be little consolation when facing the New Year and potentially tighter milk supply.

Competition will come from overseas. So even though domestic milk supply may be reduced indicating higher milk prices, imports may have a limiting factor for price potential. Australian milk production in 2013 is forecast at 10.14 million metric tons, 1.2% higher than the estimated 10.01 produced in 2012. In 2012, cheese production grew on an annual basis 12% to an estimated 385,000 metric tons and is forecast at 390,000 metric tons in 2013. Dairy exports in 2013 are projected at 673,000 metric tons, 14% higher than in 2012 Cheese exports will be the leader and are projected to increase 24% in 2013.

Upcoming reports:

- Global Dairy Trade auction on Oct. 16
- Livestock, Dairy, and Poultry Outlook report on Oct. 17
- September Milk Production report on Oct. 19
- September Cold Storage report on Oct. 22
- November Federal Order Class I price on Oct. 24
- September Livestock Slaughter report on Oct. 26

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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