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March 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.

Are Milk Prices Immune to Decline?

Mar 28, 2014

Price strength is running contra-seasonal and with good cause. But how long can prices remain this high?

It certainly is exciting to experience record-setting milk prices for February, March and potentially April. March Federal Order milk prices have not yet been announced, but the month is virtually priced and is just waiting until April 2 to finalize prices. April is about one-third priced and on its way to set another record, but is still subject to price movement until around the middle of April.

There is a lot of speculation over how long prices can remain this high. Price strength is running contra-seasonal and has good cause to do so. Strong exports have really been a support to prices. Export demand has been stronger than anticipated and continues to remain strong. Prices on the Global Dairy Trade auction have been slowly moving in the other direction as supply has increased and prices have slowly decreased. Price declines have been subtle due to prices being choppy.

On the last auction, Anhydrous Milk Fat price moved to the lowest level since June 2013. Whole Milk Powder was the lowest price since March 2013. Skim Milk Powder was the lowest price since November, and Cheddar cheese price was the lowest since December. Of course, lower world prices do not necessarily indicate U.S. prices will decline, but it does raise concern over how long prices can diverge without a market correction. Domestic dairy prices above world prices will eventually impact export demand, resulting in a price correction.

There certainly is potential for cheese to decline near $2.00 per pound in a price correction, and most would lament the fact that prices could decline that much. However, it would still be a historically high price. I hear some analysts indicate that a decline of prices would be limited and that a new higher trading range has been achieved. I agree that export demand and domestic consumption should keep product prices from moving down to $10.00 or below as was experienced in 2009. However, it does not mean lows will be confined to levels no lower than $18.00 or $19.00. The job of the market is to stimulate demand with lower prices and to curtail demand with higher prices. Eventually, prices will move high enough to curb demand or stimulate greater milk production, resulting in a price retracement.

Earlier this year, manufacturers were cautiously producing dairy products only to keep in line with demand. Limited production of cheese kept inventory from expanding as usual, with inventory in February declining rather than increasing. Present indications are that Cheddar cheese stocks in March will show further decline. Recent cheese price strength has been the result of buyers stepping up to purchase supply to build inventory for later demand. Time is moving forward and continued strong prices have given more confidence to buyers and manufacturers to purchase and hold inventory. However, the pendulum is swinging back again, causing some manufacturing plants to limit supplies of cheese or dry products due to high prices. This is resulting in decisions being made to sell some milk rather than manufacture products that would increase plant stocks.

Spring flush is in varying stages with some areas of the country, showing strong production while other areas deal with lingering effects of unusual weather and have not yet moved into a period of spring flush. How much milk production will increase during this time of year is difficult to predict, but for the first two months of the year milk production has exceeded last year.

Upcoming reports:

- Prospective Plantings report on March 31
- Quarterly Grain Stocks report on March 31
- Dairy Product Production report on April 3
- World Agricultural Supply and Demand report on April 9

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.

Perception Plays a Role in High Prices

Mar 17, 2014

Here’s why both buyers and manufacturers are more confident about dairy price direction and cheese production.

We are witnesses of new records being established. Both block and barrel cheese prices set new records at the beginning of February before declining from those levels with the belief a top for the year had been established. However, a little over a month later, block cheese surpassed that level to establish another new high.

Current cash price movement is contra-seasonal, with historical patterns suggesting price weakness as milk production increases at the same time demand slows. This is the time of year when inventory rises as demand is met with extra production moving to storage to be held for later demand.

There seem to be two things taking place at the present time – one fundamental and one perception. Milk production is improving across the country, with Midwest production growth lagging other areas due to a severe winter that’s not allowing normal milk production growth. This has changed with weather returning to more normal conditions and production responding.

However, this is not the fundamental reason for continued high prices. The main reason is continuing strong exports. January cheese exports increased 46% over last year, totaling 32,118 metric tons (MT). Whey exports increased 0.2%, reaching 39,683 MT, butter exports rose 136% at 10.169 MT, and nonfat dry milk exports climbed 22.0% to 38,761 MT. The strong export pace continues supporting prices. There is no indication of this slowing anytime soon as long as U.S. prices remain competitive.

The perception supporting the market is that both manufacturers and buyers are more confident that prices will remain strong. Manufacturers were limiting cheese production to keep pace with demand, and buyers were holding back, waiting and hoping for lower prices. However, buyers cannot wait any longer with the risk of holding high-priced inventory falling to the back recesses of the mind. The feeling is that strong prices now point to stronger prices later this year. This provides the confidence for buyers to purchase at high prices. It also gives manufacturers more confidence to increase cheese production without the fear of the bottom falling out of price.

This overall feeling keeps buyers aggressive and willing to purchase for upcoming demand. Market sentiment has switched from one of purchasing on an as-needed basis to one of purchasing for future demand. As long as consumers are willing to purchase dairy products at higher prices, support will remain under the market.

USDA estimates milk prices and product prices will improve in 2014 compared to 2013. If these prices come to fruition, the All-Milk Price will be up $1.69 to an average of $21.70 per cwt. The average Class III will increase $1.26 from 2013, at $19.25. Class IV will rise $1.65, at $20.70.

Interestingly, USDA left 2014 milk production unchanged from the February estimate at 205.7 billion pounds. This indicates higher milk checks are not expected to result in an increase in milk production. I venture to say this will not be the case, as high milk prices spur greater milk output. It is unclear how much potential there is for milk production growth.

Upcoming reports:

- Global Dairy Trade auction on March 18
- February Monthly Milk Production report on March 19
- February Livestock Slaughter report on March 20
- February Cold Storage report on March 21
- Agricultural Price report on March 28
- Planting Intentions and Quarterly Grain stocks report on March 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. 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. 

Dairy’s Income-over-Feed Cost Is the Best Ever

Mar 03, 2014

Milk prices are breaking records and history is being made.

Dairy farm profitability is the best it has ever been, according USDA numbers released on Feb. 28. A milk/feed ratio of 2.55 is certainly not the highest it has ever been, but it the best since January 2008. However, an income-over-feed cost (IOFC) is the best in history at $15.01 per cwt.

One would have anticipated the years of the late 1990s and early 2000s, when the ratio was higher, would have produced the best IOFC, but such was not the case. The previous best IOFC was in September 2007 when the IOFC was $14.94 with a milk/feed ratio of 3.17.

We must remember that these numbers do not necessarily mean dairy producers are in the best financial position in history. These numbers are strictly a calculation of the All-Milk price divided by the milk/feed ratio to derive the IOFC. Costs of goods and services, land costs, etc., have certainly changed over the years, making this quite different for each individual farm. Each farming operation will have its own milk/feed ratio and IOFC, based on whether feed is grown on the farm, whether it is purchased, or whether it is a combination of the two. However, this does put the industry in perspective as we enjoy record milk prices.

There are numerous reasons supporting milk prices - one of them certainly being the weather. The Midwest has struggled with severe cold weather for over two months, hindering milk output. Eastern regions of the country have suffered through times of heavy snows as well as ice storms. Despite these hardships, milk production in January was 0.9% higher than last year in the country. It does look like weather will begin changing in the near future, which could allow for greater milk production growth. Other than the drought in California, good weather has prevailed in the West, with a definite division noted on the milk production report. Most Western states showed production increases while states in the East showed production declines from a year earlier.

Cheese manufacturers are also providing a reason for milk prices at lofty levels. Manufacturers are keeping production close to demand. No one wants to produce more than they need, with the desire to keep inventory from building at the plant level. If prices fall, plants do not want to be left with high-priced inventory. Cheese orders have slowed in some areas and in some varieties due to high prices, which results in plants slowing production to match this demand.

Buyers have been holding back in hopes lower prices will materialize before they need to purchase supply to build their own inventory. Any weakness in prices brings buyers in to pick up what supply they can. It appears the industry is caught in a cycle with no real answer as to what will break it out of that cycle. Despite this scenario, cheese inventory did increase in January out of necessity and not out of the desire to build inventory for later demand.

Milk continues to be diverted from cheese production to butter/powder production. This has provided ample supply for the domestic and international markets. Orders are being filled easily with inventories growing. Greater volumes of butter and Grade A nonfat dry milk are showing up at the spot market.

One thing we know for sure is that records have been are being broken and history is being made. Make sure you are taking advantage of these prices by hedging prices and paying down debt. Chances are prices will not remain like this forever.

Upcoming reports:

- Global Dairy Trade action on March 4
- World Agricultural Supply and Demand report on March 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. 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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