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March 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.

Declining Fluid Milk Sales Plague the Dairy Industry

Mar 30, 2012

The bright spot is that the decline in consumption of fluid milk is being offset by increased cheese sales.

Fluid milk sales have been struggling for some time and are expected to continue to struggle with lower consumption nearly every month and nearly every year. Fluid milk sales for the two most recent months of December and January showed declines of 3.3% and 2.7%, respectively.
 
There have been efforts to improve consumption, but so far they have failed to improve overall trend. Much of it has to do with preference and stereotype. By and large, milk is viewed as a commodity that fits in certain times of the day and with certain diets. For instance, breakfast is generally considered a meal that includes milk, while most lunch and dinners do not.
 
Schools lunches are different in that milk is offered and consumed on a regular basis. Some school systems have discontinued offering chocolate milk with lunches, which has reduced consumption. This was done in the name of obesity. Take away the extra sugar and kids will lose weight. However, some have instead turned to other drinks that have higher sugar content than chocolate milk. Students have indicated less desire to consume regular milk.
 
Meals other than breakfast generally consist of other types of drinks. Most people do not view milk as a thirst quencher after a strenuous workout, sporting event or a period of hard work. I believe advertising has ingrained this in us. One of my local fast-food establishments offered milk as an alternative drink for some time but ended up dumping much of it due to lack of demand. Many consumers that eat at fast food restaurants purchase soft drinks. Next time you visit a fast-food place or even a regular restaurant, look around and see what people are drinking. There are very few, if any, glasses of milk.
 
Dairy Management Incorporated (DMI) has recently outlined several strategies to boost milk consumption. It is working with McDonalds to emphasis milk in children’s “Happy Meals.” They are investing $7 million each year for the next three years in lactose-free milk promotions, a $2 million investment in value-added milk and a $5 million investment to promote retail gallon containers of milk, according to Tom Gallagher, CEO of DMI.
 
There are no easy answers to declining milk sales. The bright spot is that the decline in consumption of fluid milk is being offset by increased cheese sales. Per capita consumption of cheese continues to increase nearly every year. Per capita consumption totaled 33.3 lb. in 2010. This was up from 29.8 lb. in 2000 and up from 27.6 lb. in 1985.
 
Despite increased cheese consumption, there is plenty to go around. Inventory has grown since the Whole Herd Buyout program in the mid-1980s. The latest USDA “Cold Storage” report showed total cheese stocks in February of 987.4 million pounds. Although 5% lower than a year ago, stocks are beginning to increase seasonally, increasing 1% over January.
 
Strong milk production continues due to mild weather and increasing cow numbers. February milk production was 4.3% higher in the nation after adjusted for leap day. Cow numbers increased 9,000 head from January and 87,000 more than last year. It seems as if hot weather may be the next event that could have a negative impact on production.
 
Feed prices may tighten profitability, resulting in decreased milk output, but that will take a little while to kick in. USDA released its “Prospective Plantings” report March 30, indicating farmers will plant 95.9 million acres of corn this year, 4.0 million more than last year and the larges acreage since 1937. Soybeans plantings are expected to total 73.9 million acres, down 1.1 million from lat year.
 
Trend-line corn yields would increase carryover significantly, resulting in a lower corn price but likely not for soybeans or soybean meal. The recent decline in the corn price factored into this report, providing some price stability. Purchase call options to protect your feed price while leaving the bottom open to take advantage of a lower price if it materializes.
 
Upcoming reports:
- California Class 4a/4b prices on April 2
- Fonterra auction on April 3
- Dairy Products report on April 4
- World Agricultural Supply and Demand report on April 10
- Export statistics on April 12
- Fluid milk sales on April 13
 
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.

Faltering Fundamentals Pressure the Dairy Market

Mar 19, 2012

Projected weaker demand is expected to lower overall dairy prices and profitability this year. U.S farmers are not the only ones looking at lower milk prices.

January exports of dairy products were mixed. Fluid milk and cream exports declined 5.5 % from a year earlier. Some of this is due to economic situations and some is due to stronger milk production in other areas of the world.
 
Cheese exports increased 3%, totaling 19,415 metric tons. The percentage increase was not as high as it was last year. Nevertheless, it continues to show strength. Exports of dry whey increased 2.6% over last year totaling 38,298/mt. Exports are expected to continue to improve this year
 
Butter exports are the laggard. Exports have been running below year earlier levels since June 2011. January exports were down 27.4% to 3,003 metric tons. Despite increasing butter inventory, buyers have recently been aggressive filling orders for the Easter season. Low prices triggered interest to build inventory for anticipated higher prices as the year progresses. Butter futures suggest the price will continue to increase through November.
 
The Food and Agriculture Policy Research Institute (FAPRI) indicated in its latest baseline projections report that overall dairy prices and profitability would be lower this year than in 2011. “There is concern that demand won’t be quite as strong as earlier estimates and could push prices lower,” FAPRI said. “We do not expect, on average, for dairy producers to make great profits. But in any given year, there could be a very positive or very negative situation. That’s one of the many reasons why there’s been a push by Congress to try to make changes to dairy legislation that could smooth out some of those variations.”
 
Discussion is being held on the farm bill, with some thinking it could be done as early as June. However, it is very unlikely a revised farm bill would be done as early as June. The pattern has been that it is not settled until it absolutely needs to be, which is generally at the end of the year.
 
U.S. dairy farmers are not alone in dealing with lower milk prices. New Zealand's milk giant Fonterra Co-Operative Group Ltd., producer of about a third of the world's traded dairy products, forecast a lower payout to farmers for the season ending May 31. Fonterra said global uncertainty and concerns over China's economic outlook means dairy prices are likely to remain under pressure until at least mid-2012. One of the reasons cited was the news that China swung to a massive trade deficit in February.
 
Fluid milk sales have been slowing and continue to slow with January sales, down 2.7%. This is another month in the long line of months posting declines. One company is being innovative with its release of Cotton Candy milk. The company, Shatto Milk, based in Osborn, Mo., is releasing this flavored milk soon. It said, "We are extremely excited to offer our first limited release product. For years, customers have been requesting this unique flavor."
 
The company said the milk has a creamy base and tastes like a glass of melted cotton candy. I am not sure how appealing that will be to the general public. It will be interesting to see how well sales will fare during the limited release. Companies are experimenting with many flavors in the attempt to increase profits and improve demand. Jack-in-the-Box restaurants released a bacon-flavored shake as a limited release a few months ago.
 
Milk futures recently bounced over $1.00 per cwt after establishing a bottom in cheese prices. Current fundamentals do not look very promising for an extended rally in price. I recommend using fence positions consisting of purchasing at-the-money put options and selling call options $1.00-$1.50 above the market. Put options can be established in April and May for a reasonable cost. Cheese demand has slowed recently and is a concern in the industry.
 
Upcoming reports:
- Fonterra auction on March 20
- February Cold Storage report on March 22
- April Federal Order Class I price announcement on March 23
- February Livestock Slaughter report on March 23
- Commercial disappearance on March 27
- Agricultural Prices report on March 29
- March Federal Order class prices on March 30
- Prospective Plantings and Quarterly Grain Stocks reports on March 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.

Where Does the Milk Come From?

Mar 05, 2012

Climbing feed prices and falling milk prices spell trouble for farm profitability. Meanwhile, a new report confirms the trend toward ever-larger dairies.

Climbing feed prices and falling milk prices spell trouble for farm profitability. USDA estimates there will be 94.0 million acres of corn planted this year, making the highest amount of corn acres in 68 years.
 
One would have thought futures prices would have declined with that estimate, but that was not the case. Corn futures remained in a somewhat sideways trading range with old-crop corn pushing through the upper end of the range. Cash prices have been strong, with the basis continuing to narrow. There are 74.0 million acres of soybeans expected to be planted, down 1 million acres from last year.
 
USDA’s latest “Agricultural Prices” report showed corn price increased 9 cents from January to $6.16 per bu. Soybean price increased 40 cents per bu. to $12.30. The alfalfa hay price was $198.00 per ton, up $6.00 from January. Interestingly enough, the corn price is higher than it was a year ago while soybean and alfalfa prices are lower.
 
As a result of higher February grain and hay prices and a lower All-Milk price, the milk/feed ratio fell to 1.58 from 1.72 in January, and compares to 2.01 from a year earlier. This is the lowest milk/feed ratio since July 2009. There have been 11 consecutive months with the milk/feed ratio below 2.0. The current trend is for further narrowing of the ratio as milk production continues to increase and spring flush approaches.
 
Profitability for dairy producers may be limited or non-existent for a period of time. It does not appear any weather premium has been put into grain prices yet. Soybeans are attempting to buy acres with futures trending steadily higher while corn futures are sideways. Prices are moving in anticipation of the “Prospective Plantings” and “Quarterly Grain Stocks” reports that will be released on March 30. Traders will then focus on the planting and growing season, with a weather premium likely to be added to futures prices.
 
Traders do not generally do not put a weather premium into Class III futures. Milk futures usually post prices according to seasonality. Milk is a commodity produced every day and is affected by supply/demand. Weather can have an impact, but that impact has been reduced over the years as better technology and management practices are implemented on farms, keeping cows comfortable in hot weather or dryer in wet weather.
 
Milk receipts continue to increase as winter weather remains mild. So, where is all of the milk coming from?
 
The National Agricultural Statistics Service (NASS) released a report entitled, “Farms, Land in Farms, and Livestock Operations for 2011.” The report indicated what we already knew, and that is that farms are getting larger. In 2011, there were 51,481 dairy operations licensed to sell milk. The report indicates 50.3% of the nation’s milk supply comes from dairy operations consisting of 1,000 cows or more. Of that 50.3%, 34.6% of the milk comes from farms containing over 2,000 head. In essence, 6% of the nation’s dairy farms produce more than 60% of the milk.
 
Eleven counties marketed 25% of the nation’s milk. Seven of these eleven were in California. In order, these counties were: Tulare, Calif.; Merced, Calif.; Kings, Calif.; Stanislaus, Calif.; Kern, Calif.; Maricopa, Ariz.; Fresno, Calif.; Yakima, Wash.; San Joaquin, Calif.; Lancaster, Pa.; and Chaves, N.M. It is clear the trend is for larger dairy farms. This is a trend that is not going to change anytime soon, if ever.
 
My hedging recommendation is to cover more milk production by purchasing a $15.00 put option in April and selling two $15.75 call options for no cost, or even, money. It is unlikely milk prices will jump very much through spring flush. This provides a floor at $15.00 for one contract of milk. If the price was to increase above $15.75, you would be hedged at that price for two contracts of milk. This can be done in either 100,000- or 200,000-pound increments. In May, purchase a $15.00 put option and sell two $16.00 call options for even money. For June, purchase a $15.25 put option and sell two $16.75 call options for even money. This strategy is called a ratio spread. Do not go further than June with this strategy for now. If you followed my previous recommendations, you should already have 50% of your milk hedged. This is added coverage to minimize further losses.
 
Upcoming reports:
- Fonterra auction on March 6
- World Agricultural Supply and Demand report on March 9
- Fluid milk sales statistics on March 9
- California Class I price on March 9
- February Milk Production report on March 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 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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