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February 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.

Could Congress Support a $20.00 Floor?

Feb 17, 2012

Increasing milk, cheese and whey supplies are pressuring prices. The lower milk price has rekindled the idea that Congress should place a milk-price floor of $20.00 per cwt.

 
Mild winter weather continues to be kind to cows. Milk production is seasonally improving but at an increased rate over a year ago. Processing facilities are running at or near capacity in some areas. This is resulting in milk being diverted in attempts to find manufacturing capacity. Some of this milk is being sold for as much as $4.00 below the class price.
 
Debates have surfaced over whether there will be a spring flush this year. Increasing production at this time may result in steady production through spring, giving the impression there is no flush. Along with this debate is concern over how milk will be handled if there is a spring flush since receipts are already high. The industry has about two months to monitor and worry about that.
 
Increasing cheese production is allowing for greater dry whey production. A lower whey price has resulted and certainly is welcomed by end users as a price over 60 cents per lb. is not working for many buyers. When prices nearly reached near 80 cents per lb. in 2007, buyers found alternative products to take its place, eventually backing up supply.
 
This same scenario is happening again, but in a little different way. There has been some demand reduction, but increased cheese production results in increased whey production, adding more supply to the market. Increasing supply, along with somewhat slower demand, has caused whey price to peak in the past few weeks. The NASS weekly whey price peaked at 71.13 cents per lb. for the week ending Jan. 21 and has since declined nearly 5 cents over the past two weeks. A decline of 5 cents would correlate to a price reduction on the milk check of 30 cents per cwt. This is not a good beginning of the year.
 
Weekly NASS (National Agricultural Statistic Service) pricing will change by the first week in April. Last week, USDA published a final rule on dairy product mandatory reporting that made minor changes to data collection for the weekly Dairy Products Prices report.
 
One change is that NASS will no longer be collecting data for the weekly price report. This will be taken over by the Agricultural Marketing Service (AMS) and will require dairy manufacturing plants to submit their prices by noon on Tuesday rather than the current Wednesday deadline. Pricing results will be published on Wednesday afternoon rather than the current Friday morning release. All this does is shift the information around and gather it different way. The intent is for weekly pricing to be more accurate.
 
The lower milk price has rekindled the idea that Congress should place a milk-price floor of $20.00 per cwt. This proposed floor is to be in place until a permanent dairy bill is written. Several farm organizations, such as the National Family Farm Coalition, National Farmers Union, the National Dairy Producers Organization and others, are spearheading this movement. The National Farmers Organization is also supporting the $20.00 floor but would also push for a supply management program to go along with it.
 
It is unclear how far this will go in light of budget cuts. As long as milk continues to flow and dairy products are manufactured, Congress may not give this much thought. One thing we can be sure of is that flooring a milk price at that level would require a supply management program, or milk production would grow by leaps and bounds, increasing supply and greater inventory given current market situations.
 
USDA did increase its estimate of total milk production for 2012 to 199.0 billion pounds on the latest World Agricultural Supply and Demand Estimates report. Milk price estimates were reduced with the All-Milk reduced 35 cents from the January estimate to an average of $18.35. The Class III price was reduced 45 cents to an average of $17.05, while Class IV is estimated to be 25 cents lower, to $16.65. These are good prices historically but not good compared to last year and the current cost of production.
 
Upcoming reports:
-          January Cold Storage report on Feb. 22
-          January Livestock Slaughter report on Feb. 24
-          Commercial disappearance report on Feb. 28
-          Agricultural Price report on Feb. 29
-          California Class 4a/4b prices March 1
-          February Federal Order class prices on March 2
-          Dairy Products report on March 2
-          Fonterra auction of March 6
 
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.

Increased Production Spells Trouble for Dairy Prices

Feb 06, 2012

Milk checks will be smaller in the coming months as cheese and butter prices decline. While traders anticipate lower prices, it’s up to demand to keep this from happening.


Cash cheese and butter prices do not yet appear to have established a bottom. Cash trade has been able to remain steady for a day or two, giving traders hope that the trend may be changing. The downtrend resumes, however, dashing any bullish hopes.
 
The recent decline of nearly $1.00 in closer-month Class III futures is now being met with the cries of, “Prices just cannot go down any further,” and “Prices just have to come back.” Most of us certainly would like to think these cries will be met as our livelihoods are at stake. But, the market is not a respecter of persons and it does not care about profitability or longevity. It is affected by supply and demand. High prices cure high prices and low prices cure low prices.
 
Current supplies of cheese and butter are growing and readily available to the market. Seasonally, stocks increase during the first half of the year as demand is generally slower, resulting in product moving into storage. So, growing stocks are not a surprise or bearish in themselves. The bearishness of the present situation is that buyers are holding back from purchasing cheese and butter for inventory.
 
Currently, there is no concern of shortage or tight supply. It is a buyer’s market. If prices were to find a bottom and begin to trend higher, it would bring buyers back into the market more aggressively. The intent would be to purchase what they could at the lowest price possible. That is when buyers begin to compete, resulting in increased prices.
 
Cooperatives Working Together (CWT) recently agreed to provide export assistance for 10.955 million pounds of butter for delivery from now through June 2012. Growing stocks as a result of increased butter production prompted CWT to assist in butter exports. This is the first butter export assistance since October 2010. The hope is that butter price will be supported through the increased sales overseas aided by CWT.
 
USDA’s latest “Dairy Products” report indicated increased cheese and butter production for December. Production of American cheese increased 1.2% to 371.0 million pounds over December 2010. Italian cheese production increased 3.5% to 409.0 million pounds. This put total cheese production at 929.0 million pounds, 2.4% above a year earlier. Butter production jumped 5.2% to 166.0 million pounds. Steadily increasing production at this time of year is going to increase inventory. Exports have been strong for more than a year and are a large reason why record milk prices were experienced in 2010.
 
Even though record milk prices were achieved in 2011, profitability was not great. High feed prices kept the milk/feed ratio confined to a low range of 1.73-2.14, which is certainly nothing to be excited about. This year is starting off with a milk/feed ratio of 1.77, according to the latest USDA “Agricultural Prices” report. This is the lowest monthly ratio since May 2011.
 
Milk checks will be smaller in the coming months, according to current futures prices. March and April Class III futures indicate prices could be below $16.00, a level not seen since January 2011. At the time of this writing, only the September contract is holding above $17.00. Class IV futures have been following butter lower. Dry whey futures are anticipating a decline in price as the year progresses. Futures contracts have fallen nearly 15 cents per pound over the past month, even though weekly NASS whey prices continue to increase. Traders anticipate lower prices will be coming. It is up to demand to keep this from happening.
 
Upcoming reports:
- World Agricultural Supply and Demand report on Feb. 9
- Export statistics on Feb. 10
- Fluid milk sales on Feb. 10
- Fonterra auction on Feb. 15
- March Federal Order Class I price on Feb. 17
- January milk production report on Feb. 17
- President’s Day holiday on Feb. 20 – Markets will be closed

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 his 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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