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September 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.

Cheese Prices Reach Year-ago Levels but Not Profitability

Sep 28, 2012

Meanwhile, milk supply meets demand, but little remains for spot purchases -- a situation that won’t disappear anytime soon.

After nearly six weeks of cheese trading in the price range of $1.82-$1.90, prices were finally able to break out to the upside. The block price quickly moved to and through $2.00, reaching $2.0825, the highest price since Aug. 10, 2011, before posting a decline.

Even though the October and November futures indicate Class III prices near $21.00, it is little consolation during a time when profitability is non-existent in many cases. (This certainly is after the fact for those who have been forced out of the business of producing milk.)

Current excitement of higher cheese, butter and milk futures prices is magnified by the fact that grain prices have been trending lower. This improved the milk/feed ratio marginally. The ratio for September was 1.46, up from 1.36 in August. Despite the 10-cent increase in the soybean price to $16.30 per bu. and the increase in the alfalfa hay price by $2.00 to $205.00 per ton, corn declined 28 cents to $7.35 per bu. The All-Milk price jumped $1.00 to $19.10, resulting in the improvement to the milk/feed ratio.

Farms that have been able to receive the benefit of the Milk Income Loss Contract (MILC) payments have been in a significantly better position. Over $1.00 per cwt. has been added to income for each of the past five months, with the largest payment made in July at $1.7441.

These payments are about to come to an end. Since Sept. 1, the calculation of the MILC payment has reverted back to what it had been. Payment calculations will decline to 34% from the previous 45%. The feed adjuster will move up to $9.50 per cwt. of the National Average Dairy Feed Ration, up from $7.35 per cwt. Eligible production will revert back to 2.4 million pounds from the previous 2.985 million pounds. The MILC payment for August is $1.2943. If the current calculation was in place during August, there would not have been an MILC payment.

If Congress agrees on a new farm bill there will be no MILC payment, as there is no provision for it. If Congress agrees on a 3-month extension of the current farm bill, calculations for the MILC that have been in place since Sept. 1 will be in effect, potentially minimizing or eliminating any further payments.

The dry whey price has been slowly and steadily increasing. The current weekly AMS price is $0.5930 per pound, the highest level since April 7. There is some indication prices may be at or near a plateau. Supply is sufficient, with resellers offering loads to supplement manufacturer supplies.

Seasonal growth in milk production is taking place but not at the usual pace. Increased production per cow is being offset by heavy culling. Milk supply is sufficient for demand, but little is left over for spot purchases. This situation is not going to go away anytime soon. Feed prices have been trending lower but will remain historically high the rest of this marketing year. Limited feed supply and high feed prices will keep the nation’s dairy herd from expanding and thus limit overall milk output.

We have no further recommendations to hedge milk at this time. Hedges that are in place through the end of the year should be held. Previously sold put options should be held to expiration to improve hedge prices. Feed prices need to be watched closely, with call options rolled down before harvesting is complete. Continue to hedge feed prices utilizing options or option spreads to allow for the ability to capture lower prices if they develop.

Upcoming reports:

- Global Dairy Trade auction on Oct. 2
- August Dairy Product Production on Oct. 3
- World Agricultural Supply and Demand report on Oct. 11


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.

Milk’s Uncertain Price Momentum

Sep 17, 2012

Will it be the the milk supply, corn prices or consumers' pocketbooks that drive dairy prices?

Cheese prices have surprisingly remained in an 8-cent trading range over the past five weeks due to seemingly bullish events and perceptions.

Manufacturers were concerned over where the milk supply would be by the end of the year due to high feed prices and increased culling. The draw of milk for school systems tightened manufacturing supply and the availability of spot loads. This came at a time of year when demand increases as manufacturers and handlers took forward to the holidays.

Recently, however, concern over the tight supply has been gradually easing. Production across the country has reached and passed the seasonal low, with some areas showing some production improvement. The Midwest region actually reports milk supplies in some areas to be above year-ago levels. This seems impossible given the summer we have had, yet that is what is being reported.

August’s “Milk Production” report will be released on Sept. 19 and will give us a good picture of how much milk was produced under adverse conditions. The anticipation is for a decrease in production from the previous year. It was anticipated that July production would be lower than last year, but, surprisingly, that is not what happened. So, it could go either way on the upcoming report, but lower production is likely.

USDA anticipates milk production to show little change. The latest World Agricultural Supply and Demand Estimates (WASDE) report released last week showed a decrease of 100 million pounds of milk this year from its August estimate. Production next year is estimated to reach 189.0 billion pounds, unchanged from the previous estimate and down 1 billion pounds from this year. This would be the first year-over-year decline since 2009 and only the second year-over-year decline since 2001.

USDA is not very optimistic on milk prices or product prices for next year. It indicates the possibility of very little change in the average price. The average Class III price this year is estimated at $16.85, while the average price next year is $16.30. Class IV is estimated to average $15.60 this year and $16.45 next year with an All-Milk price of $17.90 this year and $18.35 for 2013.

There has been a lot of anticipation of significantly higher prices with ideas of Class III prices reaching $25.00-$28.00. We have heard high estimates in years past when milk/feed ratios were low and profitability non-existent. However, price has never been able to reach those levels. So far, the record high Class III price was $21.67 set in August last year. Feed prices were not as high then as they are now, and culling has increased significantly, lending to the idea that another $4.00-$5.00 increase in price is well within reason.

However, the question that needs to be asked is, “Will consumers be willing and able to pay for milk and dairy products at significantly higher prices?” The last time prices moved over $21.00, demand began fading, resulting in declining prices. It is very difficult to determine where a price threshold may be.

Milk futures have been following corn futures closely for some time. These two commodities are closely tied to one another. There are indications corn futures may have reached a threshold, with demand destruction becoming evident. USDA did not reduce production for this year’s crop as much as the trade expected on the WASDE report. The inability of futures to break out of the sideways trading range it has been in for the past two months gave credence to the old saying that a short crop has a long tail. This could hold back milk prices from escalating if indeed they continue to follow the historical pattern.

Upcoming reports:

- Global Dairy Trade auction on Sept. 18
- August Milk Production report on Sept. 18
- Federal Order October Class I price announced Sept. 19
- August Cold Storage report on Sept. 21
- August Livestock Slaughter report on Sept. 21
- Consumer Confidence on Sept. 25
- Agricultural Price report on Sept. 27

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 firm’s 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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