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June 2013 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 and Butter Supply Dims Price Outlook

Jun 24, 2013

The magnitude of those stocks is the bigger issue dampening the outlook for significantly higher prices this year. Has demand slowed?

Two major reports for the dairy industry were released this past week and neither of them suggest milk prices will trend higher anytime soon.

Historically, milk prices trend higher into September or October before slipping back. During the first five months of this year, the Federal Order Class III milk price has fluctuated $1.59, with the high in May at $18.52. Current futures price for June indicates a Class III price of $18.04, which is very close to the price in January. Current futures contracts indicate a seasonal price curve with a price over $18.80 for September and October. Futures contracts generally carry this premium each year and then adjust accordingly as market factors influence price movement.

Dairy farmers continue to rise to new challenges and produce milk even under adverse conditions. Drought last year in many parts of the nation slowed milk production to some extent in those areas. However, production remained strong across the nation, resulting in record milk production. High feed prices and feed shortages in some areas created other difficulties, yet production remains strong with USDA projecting another record year. The latest milk production report for the month of May showed an increase nationwide of 0.8% over last year. February and March showed slightly lower milk production, but the industry is back on track to outpace last year.

The bigger issue dampening the outlook for significantly higher prices this year is the magnitude of increasing cheese and butter stocks. Growth in milk production has been slower than the pace set last year, but inventory growth of dairy products has been exceptional. During the first five months of this year, American cheese stocks increased 162.0 million pounds more than the same period of time last year, with stocks reaching the greatest level since September 1986. Total cheese inventory has exceeded last year’s pace for the first five months by 251.5 million pounds. Butter stocks have grown by a whopping 233.8 million pounds more for the first five months compared to last year, taking it back to a level last seen in late 1993.

Interestingly, CWT has continued to aid in the exports of butter and cheese to the tune of 60.812 million pounds of cheese and 51.727 million pounds of butter so far. Of course, some of these exports are still considered part of these stocks as assisted exports may not be completely shipped until as far out as October. What this indicates is demand has slowed. Milk production through May has not been much higher than last year, but inventory has increased substantially.

Cheese and curd exports have been running above last year indicating much of the slowing of demand is domestic. Buyers have been purchasing regularly on the chance that supplies could tighten later in the year, but with the current pace of inventory growth, it does not appear this concern will become a reality.

My recommendation is to extend price protection through October with the use of option spreads consisting of purchasing at-the-money puts; selling puts $1.25 below and selling call options $1.25-$1.50 higher for about 20 cents. This strategy has worked well the past few months and should continue to work well in the current market environment.

Upcoming reports:

- Agricultural Price report on June 27
- USDA Planted Acreage report on June 28
- Quarterly Grain Stocks report on June 28
- GDT auction on July 2
- Dairy Products report on July 3
- Export sales report on July 3
- June Federal order Class prices on July 3
- California Class I price on July 10

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. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. 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.

Strong Milk Price May Not Reflect Profitability

Jun 10, 2013

What’s behind dairy producers’ struggle with the extended period of low milk-to-feed ratios?

Dairy farmers have been struggling with low milk/feed ratios for a long time. In fact, the last time the ratio was above 2.0 was in March 2011. The ratio has been above 2.0 just 18 months out of the past 63 months. A level of 3.0 has historically been used as a profitability level wherein expansions will take place.

Interestingly, during this extended period of low milk/feed ratios, we have experienced record high milk prices. There have been periods of low milk prices in the past that have actually yielded the best milk/feed ratios due to correspondingly low feed prices. The idea of high milk prices does not necessarily mean more profitability. So then the question arises as to why higher prices push greater milk production and increasing cow numbers. According to the numbers, it does not seem to make sense. However, part of it has to do with psychology and some of it has to do with each individual operation.

Farmers always desire to produce more when prices are higher. It does not matter if it is corn, soybeans, wheat, cattle, hogs, etc. Those bigger paychecks always make one feel good. I realize that can only go on for so long, until income does not cover input for a period of time.

Those who raise quite a bit or all of their feed have been in a better position during this extended period of low ratios. Margins improve when a person is not at the mercy of the market. Quality feed can be harvested and stored for feed rather than having to pay for that quality. I do want to add that it is not always the case that those who purchase their feed are at the mercy of the market. Those who utilize the futures and options market to hedge feed purchases can achieve the same or similar results of those who raise their own feed.

Many farmers have had a real taste of this over the past year as drought conditions forced those who generally have their own feed into purchasing it. This really put a crimp on the income of many dairy producers. There were high hopes this year would be better and in some areas it is. Other areas have really been struggling with significant winterkill in alfalfa and the delayed planting of corn. In some areas, it looks like corn may not even be able to be planted. The impact of this is yet to be seen, but dairy farmers are resourceful and have always been able to find a way to squeeze the milk out of the cows efficiently.

This efficiency keeps cheese production strong. The latest USDA "Dairy Products" report showed total cheese production for the month of April at 3.2% above a year ago, with 928.2 million pounds produced. Of that total, American types increased 2.4% and Italian types rose 2.9%. Current strong production as well as strong production in previous months continues to push inventory levels higher. Seasonally, inventory will increase until June, and then it begins to decline as milk production and cheese yields decline. This continues through the end of the year. The current level of milk production and cheese production may extend this growth a bit longer unless demand increases greater than it has been or production declines in the next month or so.

Cheese and curd exports during the month of April increased 6% over the previous year, totaling 25,551 metric tons (mt). Whey exports were up 2.2%t to a total of 43,058mt. Strong exports are expected to continue the rest of this year but maybe not as strong as earlier anticipated when drought gripped New Zealand and Australia. Butter exports during the month of April fell 28.8% from a year ago, totaling 4,267mt. This is the same decline experienced in 2012 compared to 2011. Cooperatives Working Together has not assisted in the export of butter since April 29. It is not surprising butter stocks are growing at a rapid pace. The bright spot was that exports of nonfat dry milk for the month jumped 40.5% to 55,187mt.

Upcoming reports:

- World Agricultural Supply and Demand report on June 12
- Global Dairy Trade auction on June 18
- May Milk Production report on June 19
- May Cold Storage report on June 21

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. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. 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.  

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