Sep 23, 2014
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January 2014 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.

What’s Driving Cheese Prices to Near-Record Highs?

Jan 17, 2014

Few predicted prices would climb this high, but the drivers have been there for months.

Milk production has slowly regained the losses experienced during to the recent extremely cold weather. Cows, and milk production, have faced a lot of challenges throughout the past 12 months. Not only has there been an impact from unusually hot weather early this fall, which had a large impact on milk production, but lower quality corn silage in many areas has added another challenge.

Most producers indicate this impacted production for a while, but proper ration balancing has overcome the forage quality issue. However, this has not been without additional cost. Milk production has had a difficult time increasing seasonally, resulting in continued premiums paid for the purchase of extra milk. This has had an impact on butter and cheese prices. The block cheese price has now moved to levels last seen in August 2011 and is nearing the record high of $2.28 1/2 set back in May 2008. No one predicted cheese prices moving to current levels. The combination of heavier culling last year of cows as well as heifers, strong dairy exports, strong domestic demand, and poor feed quality has provided significant support to the market.

Recent higher milk prices and lower feed costs have increased the desire to limit culling and fill empty stalls in barns. It may take a while to build milk production back to trend line growth, but this will happen as time moves forward. USDA estimates milk production to increase 2.1% this year, reaching a record 205.6 billion pounds. One has to wonder if that will be enough to meet demand as the international demand for dairy products grows. U.S. dairy product prices have been competitive with world prices until recently as cheddar cheese is now pricing itself out of the world market. However, growing world demand will need to be filled as long as there are those willing to pay for it.

High cheese prices have caused some manufacturers to slow production in order to keep output closely aligned with demand. There is little desire to increase production and build inventory due to the potential for cheese prices to decline. They do not want to be holding high-priced product. This has resulted in some plants selling milk to limit production. However, this desire to limit production and manage inventory may keep overall inventory of cheese from growing seasonally. This could support the market for a longer duration than usual. Bear in mind that price support may not mean $20.00 milk but at potentially higher prices than one would expect. Current Class III milk futures already have a discount factored in.

One cannot be complacent in the current market. Class III futures set a record high $21.67 in August 2011. Block cheese price ranged from $1.79-$2.15 that month. High dry whey price provided substantial support to the pricing formula. The September 2011 Class III price fell $2.60 cents with another $1.04 drop the following month. I am not suggesting the same thing will happen again, but it certainly is a sobering thought and one to be mindful of.

CME Group is making changes to the current nonfat dry milk spot call contract. Effective Jan. 27, 2014, Extra Grade nonfat dry milk spot trading will be discontinued. Only Grade A nonfat dry milk will be traded. A change in payment for purchased nonfat dry milk product will be made requiring payment to be made within 3 business days after the date of invoice rather than making payment by wire transfer on the fourth day after the date of sale.

Upcoming reports:

- Global Dairy Trade auction on January 21
- December Cold Storage report on January 22
- December Milk Production report on January 23
- Federal Order Class I advanced price on January 23
- January Agricultural Price report on January 31
- Cattle Inventory report on January 31

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. Any opinions expressed herein are subject to change without notice. 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 communication.

After Dairy’s Good 2013 Year, What’s Next?

Jan 06, 2014

While reduced feed costs and good milk prices look promising, it's unclear how potentially higher milk production, feed quality issues and exports will play out.

It has been a very good end to a year filled with much emotion. Exceptionally high feed prices were present earlier in the year with increased anxiety as planting delays were prevalent. Corn prices over $7.00 per bushel, soybeans at $15.00 per bushel, and soybean meal over $450.00 per ton were being traded on the futures market in early last year.

The milk/feed ratio began 2013 at 1.57 with an income-over-feed cost of $7.22 per cwt. Dairy producers were struggling with tight margins and the potential for tighter margins if crops would not be planted or yields significantly impacted. Despite 8.3 million acres of prevented plantings, areas plagued with late planting and areas suffering from drought, genetics, better weather and a late fall was of great benefit to crops. The result was a corn price that was $2.56 per bushel lower at the end of 2013 compared to the beginning of the year. Soybean prices declined $1.30 per bushel with alfalfa hay prices down $30 per ton. What was initially feared as a disaster turned out favorably, improving profitability.

Milk prices improved with an All-Milk price in January 2013 moving higher to end the year at $21.80 despite record milk production. Demand has been good with exports significantly higher. The hottest dairy product of the year was nonfat dry milk, with very strong prices during the last half of the year. Grade A nonfat dry milk spot price increased from $1.73 per lb. on July 1, ending the year at $2.06. The AMS weekly average price closed the year 46 cents per lb. higher than the beginning of the year.

International demand has been strong and it appears as if that will continue. However, price may be at a level at which there is some buyer resistance while at the same time more product is showing up at the daily spot market. The average Class III price in 2013 was $17.99. The average Class IV price was $19.05 and the average All-Milk price was $20.00.

The market has not exhibited the usual decline into the end of the year. Cheese prices remain supported, pushing to price levels last seen in early November 2012. This is causing as much excitement as it is causing some concern. Excitement stems from the idea that exports will remain strong with milk supply not overwhelming the market. Concern stems from the possibility of a price void developing under the market. Once current buyer interest is filled, price weakness could send buyers to the sidelines. There have been a few reports from the Central region of the country of cheese orders slowing. This has not yet caused a back-up, but it’s something the industry is watching.

The beginning of 2014 looks very promising with reduced feed prices and good milk prices both actual and projected by the futures market. Impact of the relationship that generally exists between corn and milk has not yet been seen. Will this historical relationship become a greater factor as time moves on? That depends on the potential for increased milk production once most cows transition into a new lactation and feed quality issues are balanced. Exports will also play a large role in prices. We have another year before us, and along with it will come continued challenges and hopefully continued profitability.

Upcoming reports:

- Global Dairy Trade auction on Jan. 7
- World Agricultural Supply and Demand report on Jan. 10
- California Class I price on Jan. 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. 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 communication.

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