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August 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.

World Dairy Demand Provides Plenty of Opportunity

Aug 30, 2013

While domestic weather conditions and milk production command attention, providing quality dairy products to a hungry world market should be the focus.

A new fiscal year is fast approaching for the dairy industry, and with it comes a change to monthly milk production reporting.

The National Agricultural Statistics Service will reinstate reporting of cow numbers and milk production per cow beginning in October on the monthly Milk Production report. However, this more complete reporting will be quarterly and not monthly as it had been prior to April when it was suspended to meet budget reductions required by sequestration.

Initially, monthly milk production reports were to be discontinued altogether, but fortunately common sense prevailed giving us the information of pounds of milk produced. This was at least better than nothing. On October 21, the industry will again see cow numbers and production per cow, but only on a quarterly basis. Again, this is better than nothing. What the industry needs is a monthly reporting of this information as it had been prior to sequestration. But life goes on and we will do the best with what we have.

This brings us to the subject of milk production. Milk production in July was stronger than anticipated, but really not much of a surprise when comparing to similar weather last year. Once the market digested and realized overall production was not affected as much as anticipated, cash prices and dairy futures declined.

Recently, the market has exhibited similar strength due, in part, to the recent hot weather again being experienced. This bout of hot weather is not expected to last as long as the duration during July, but nevertheless reduced milk receipts at a time when greater demand of fluid milk for school systems is strong. This too is not expected to last long and may have minimal impact.

Many dairy farmers have been taking advantage of reasonable replacement heifer prices to fill the empty stalls in barns that were left empty as a result of heavy culling last winter and spring due to high feed prices and feed shortages. Feed is now more abundant in many areas, making less expensive feed prices.

Class III milk futures contracts in 2014 already anticipate lower milk prices. If a killing frost comes late this fall, and the nation harvests the corn and soybean crop the USDA estimates, there is strong possibility milk prices next year will be lower than currently trading in the futures market. This may not be all that bad if the income-over-feed cost improves. Greater availability of milk for bottling and manufacturing will allow the U.S. to continue to improve world market share.

World dairy demand has increased dramatically in recent years, with U.S. dairy exports topping $5 billion for the first time in 2012. Exports have reached a record high of $3.17 billion for the first six months of this year, a 15.5% increase over the record pace set last year for the same time. During the same six months imports of dairy products declined 0.67% from a year earlier.

For the first time, the value of exports was more than double the value of imports. Not surprisingly, the leading category was nonfat dry milk with the value of export increasing by $196.4 million, up 26.9% to a total of $927.1 million. The leading category on a percentage basis was fluid whey at $6.9 million, up 604.8%.

Gaining world market share is a priority. Current U.S. prices are competitive on the world market and, with the recent Fonterra incident and previous Chinese dairy product incidents, greater interest has been shown in U.S. dairy products. Providing quality dairy products to a hungry world market should be the focus.

Upcoming reports:

- Global Dairy Trade auction Sept. 3 
- Dairy products report on Sept. 4
- Dairy exports on Sept. 4
- Federal Order class prices on Sept. 4
- World Agricultural Supply and Demand report on Sept. 12

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. 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. 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.

Will the U.S. Reap a Benefit from Fonterra?

Aug 19, 2013

What the contamination scare means for the market, supply and demand, and your dairy.

Dairy newswires have been dominated by the discovery of bacteria in three batches of whey protein concentrate from New Zealand. The whey was used in the manufacture of sports drinks and baby formula.

China immediately halted imports of some products from New Zealand and Australia. Eventually Russia, Kazakhstan and Belarus got on the bandwagon, limiting or banning imports followed by Indonesia and Sri Lanka. Fonterra is refuting the ban from Sri Lanka, which halted advertising and sales of their products for 14 days, as none of the product-in-question to that country. One can say what they want, but countries and consumers will react to instances of possible or actual food contamination, and rightly so. A quality product must be offered to consumers or they will go elsewhere.

The reaction of dairy traders when the news broke was bullish on the idea that this could be positive for demand for U.S. product. However, it was a knee-jerk reaction. As more news was released, it was discovered that the product contamination was not widespread and was confined to three batches that were essentially recovered. This took milk futures back down, and they have been weak ever since. The addition of the other countries joining the ban of products did nothing to spark buying interest in dairy futures, and why not?

Instances like this can be looked at two ways. Countries will look for other sources to obtain supply if they need some. There have been more inquiries of product availability and price since this event, but it is unclear whether there have been increased deals finalized.

The other factor could be consumers backing away from some products in general, no matter where they come from, until they themselves feel ready to purchase. After all, the consumer is the one who is in charge, and prices will rise and fall according to demand. The difference in this case is that the affected product is not cheese or butter, which are the drivers of milk and butter futures. Obviously, there could be long-term impact as interest in other products may be generated. However, as in most things, steps will be taken and product again will be deemed safe and business will resume as usual.

Traders are not concerning themselves with "potential" or "projected" business but are concerned with current supply and demand. The industry currently feels there are ample supplies to meet demand. Time is running out for a third-quarter, demand-driven rally. Historically and seasonally, cash prices and futures prices reach a peak in September or October, but time is running out with markets void of a catalyst to rally the market.

Another hindrance to domestic demand is fluid milk consumption. Fluid milk sales in June lagged last year by 5.9% with year-to-date sales down 2.9%. Total organic sales increased 5.8% with year-to-date sale up 3.1%. Even though organic sales are positive, the volume of product is 1/22 of conventional products. This trend of lower consumption has been a concern for quite some time.

What this means is that we cannot base marketing decisions on perceptions but need to base them on each individual farming operation.

Upcoming reports:

- Global Dairy Trade auction on August 20
- September Federal Order Class I price
- July Livestock Slaughter report on August 22
- Agricultural prices report on August 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.

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.

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. 

Lower Feed Prices or Strong Global Demand: Which Will Dominate Dairy Prices?

Aug 05, 2013

Lower grain prices generally depress milk prices. Increasing world demand should support the dairy market. The outlook?

Market globalization and the rapid flow of information at our fingertips 24 hours a day has certainly changed everything. The traditional weather market for crops, which occurs in June and July, is behind us. However, traders have now managed to extend the weather market to virtually every month of the year, finding weather events in every part of the world an opportunity to trade. This certainly has heightened market volatility year around.

With current crop conditions historically good and running near the 10- and 20-year averages, there is not much to get excited about. There are areas of the country in which corn and soybean crops do not look very good, suffering from a range of effects from very dry weather to over abundance of moisture. Farmers in those areas are wondering why grain prices continue to weaken.

Feed prices may be more manageable this year, especially if USDA is correct in its estimate of corn ending stocks reaching 1.959 billion bushels and soybeans at 295 million bushels this year. There are estimates the December corn price could decline to near $4.00, with the soybean price near $10.00 when all is in the bin. This is welcomed by dairy farmers and livestock feeders around the country.

However, lower grain prices generally translate into lower milk prices. Looking back in history there has been a strong correlation of this. One thing we can look at is the milk/feed ratio, which does provide a measure of the price of 51 lb. of corn, 8 lb. of soybeans, and 41 lb. of hay compared to the All-Milk price. Over the past two years, we have experienced Class III milk prices ranging from a record high of $21.67 to a low of $15.23, while milk/feed ratio has ranged only from 1.91 to 1.34. So this shows very little divergence in price between feed and milk.

So where does that put us this year and next year with milk prices? Milk futures are already anticipating lower prices the rest of this year and next year. Since mid-June, new-crop corn prices have been in virtually a steady decline, and milk futures have not been immune to the weakness. In fact, 2014 milk futures have been hit the hardest in just the past two weeks as traders turned more bearish on prices with the anticipation of lower grain prices meaning lower milk prices.

World demand will be an important factor for milk prices. Domestic prices are comparable to world prices, which increases the interest from foreign buyers. This will provide support to dairy and widen the correlation between grain prices and milk prices. Increasing world demand is expected to continue for dairy and hopefully improve prices and income.

We will not be alone in the desire to provide the world market with quality dairy products. Farmers in other countries will rise to the challenge. Europe is planning to eliminate quotas in 2015, allowing for greater production potential. Other countries are encouraging their farmers to increase production. However, the past few years of tight margins from limited income may make this a tall order.

Upcoming reports:

- California Class I price on August 9
- World Agricultural Supply and Demand report on August 12
- Global Dairy Trade auction on August 20
- July Milk Production report on August 19
- July Cold Storage report on August 22
- July Livestock Slaughter on August 22

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. 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. 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. There is risk of loss in commodity trading may not be suitable for recipients of this.

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