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July 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.

A Difficult Year Lies Ahead for the Dairy Industry

Jul 23, 2012

What can the market bear as near-record drought conditions and low corn stocks bolster both corn and milk prices?

We are moving into uncharted waters and interesting times as very dry weather covers nearly 55% of the nation.

Yes, we saw this back in 1988, but corn stocks going into that year were at 4.259 billion bushels, much higher than this year. The drought of 1988 pulled carryout down to 1.930 billion bushels. Ethanol was not being produced or mandated at that time and the use of corn for manufacturing was not as great as it currently is.

Current drought conditions are nearly the same as 1936, which again was a bit different than they currently are. If you can believe it, there are four other years during which the percent of the nation in drought was greater than the present. A cause for great concern is carryover of stocks, which are estimated to only be 903 million bushels for the end of the current marketing year, according to the latest World Agricultural Supply and Demand report. This spells real difficulty for the dairy industry.

Class III milk futures have been increasing, with contracts this fall exceeding $19.00. Prices are certainly higher than was expected this spring, but that provides little consolation as feed prices continue to rise. Since mid-June, December corn futures have increased nearly $3.00. Over the same period of time, December milk futures have increased nearly $2.60. This does not improve the milk/feed ratio and may actually decrease it further, depending on the price of soybeans and alfalfa hay, both of which also are increasing substantially.

As of June, we have not seen the evidence of the effects caused by the current situation. Dairy cattle slaughter in June totaled 229,000 head, up just 10,000 head from a year earlier and down 22,000 head from May. This was the lowest monthly slaughter since July 2011.

However, the latest USDA Milk Production report did indicate a slowing of milk production from the previous year. Production in all 50 states was up 0.9%, with cow numbers still up 54,000 head from a year earlier, but down 19,000 head from May. July is expected to see a significant decline as culling increases and the effects of hot weather are seen. July milk production is expected to show negative year-over-year growth for the first time in 29 consecutive months.

Lower milk production should tighten the market and push prices higher. The question is, “What can the market bear?” and “Will U.S. dairy prices lead world prices higher?” A recent estimate indicated cheese prices could reach $1.92 later this year. If that is achieved, then milk futures really do not need to increase any further. A block cheese price of $1.92 with barrels at $1.90 and butter at $1.80, as an example, would indicate a Class III price of $19.34 -- nearly the price current futures are. However, variation will be based on actual AMS weekly prices. Traders are already anticipating this price by putting a premium in the futures contracts.

My current recommendation is to hold off on any further milk price protection strategies but to keep a vigil on weather and grain prices. If crop conditions begin to stabilize and grain futures cease moving higher, fence strategies need to be implemented to cover a greater portion of your milk production. Those who currently hold previously recommended fence strategies consisting of the purchase of $16.00 and $17.00 puts and the sale of $18.00 and $19.00 calls should hold those positions. That’s due to the price premium in the market and the fact that the end result will be a significantly better milk prices than what was initially protected.

Let’s all hope it rains soon and the drought ends.

Upcoming reports:

- Global Dairy Trade auction on July 31
- Agricultural Price report on July 31
- Dairy Product Production report on August 1
- July Federal Order class prices on August 1

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.


 

Traders Focus on Weather as Much as CME Prices

Jul 09, 2012

Concerns grow over grain crops, milk prices, farmer impact and consumer demand.

All eyes are on the weather and grain markets. Farmers and the industry were excited over a nearly ideal spring when early planting possibly opportunities sparked talks of potential phenomenal yields.

Those hopes are being currently dashed on a weekly and even daily basis in many areas. Weekly deterioration of the crop continues to lower the potential yield and raise price. Early planting means early pollination, which came at the wrong time this year. Pollination takes place over a period of weeks in the main corn growing areas of the Midwest, with these weeks right smack in the hot and dry period.

The dairy and livestock industry is watching this with growing concern. Feed prices are going to be high, making it more expensive to feed those animals. Culling already has increased, primarily in the livestock industry. It will begin in earnest in the dairy industry shortly. Increasing milk futures gave hope to dairy producers for better milk prices and an improvement in profitability. It does not appear, however, that the milk/feed ratio will be able to improve because of the rising feed costs.

I have been hearing repeatedly that the milk price has to go significantly higher due to grain prices increasing. That is the likely assessment and is historically accurate. Higher feed prices will impact milk production, tightening milk supply and increasing price.

The interesting thing this year is that world prices are somewhat depressed. There was much excitement over a 14% increase in the Global Dairy Trade weighted index during the early June event, but the weighted index has declined over the past two sessions, erasing nearly half of its gains. Milk production in other countries has been strong and remains strong compared to the previous year. Milk production in Europe is declining seasonally. Production in Europe has been very similar to the U.S., with current production running 2% above last year and currently in a seasonal decline.

Europe’s butter stocks are sufficient for needs, with excess volumes clearing to their PSA program. As of the end of June, 99,574 metric tons have moved to PSA storage. Last year, over 100,000 metric tons cleared before it began to be removed. This program will remain open until Aug. 15 before it will be closed and product can begin to be removed.

New Zealand production finished the year nearly 9% higher than the previous year, with the industry optimistic about the upcoming year. Australian milk production is currently up 2%. These countries utilize mostly grazing and are not as susceptible to high grain prices. However, that does not mean they will not be affected. Lower milk production in the U.S. would mean more demand for foreign dairy products, which would possibly tighten their supplies.

The market may be doing a balancing act in the near term as grain prices would eventually mean higher milk prices, but higher milk prices would decrease demand. According the USDA’s “Dairy Market News” publication, export demand remains good, but there is growing concern that increasing price levels on the CME spot market may decrease export demand. Cooperatives Working Together continues to accept requests for export assistance for cheese, which has helped exports significantly.

It looks like it will be a very difficult year, and one that will have great impact on farmers. However, the impact will also be felt by consumers across the nation as they face significantly higher food prices. This will result in consumers changing their purchasing habits, eliminating some convenience or luxury foods by turning more to staples. Disposable income will then decline, which in turn have an impact on the economy as a whole. Prices will then decline to stimulate demand, and the cycle will continue. Yes, we lived through the drought of 1988, but we did not have ethanol production and we had a corn carryover of more than 4.259 billion bushels. This year is completely different and will be a challenge

Upcoming reports:

- World Agricultural Supply and Demand report on July 11
- Fonterra auction on July 17
- June Milk Production report on July 19
- June Cold Storage report on July 20
- Bi-annual cattle inventory report on July 20
- June Livestock Slaughter report on July 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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