Aug 20, 2014
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April 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.

Could Grade A Nonfat Dry Milk be the Leader?

Apr 28, 2014

After a strong price run-up last year, nonfat dry milk prices have declined. Now, discounts are being offered to entice buyers and move some inventory.

April has been another month of record milk prices. It does, however, look like that is gong to be the end of it for the rest of the year unless cheese prices can rally and make new highs. That is unlikely unless milk production will be affected enough to result in a shortage later in the year. World prices weakening on the last five consecutive Global Dairy Trade auctions -- and indications that the Chinese pipeline has been filled, resulting in exports moderating -- give the impression prices may settle back a bit. The likelihood of prices falling substantially is not very great, but a lower trading range may eventually be established. However, that lower range will be historically high.

High milk prices so far this year have done little in the way of limiting demand. Any decrease in demand that may have taken place domestically has been made up by strong exports. Cheese inventory was not able to build until March, during which the increase was light, with inventory still remaining below last year. This provides the confidence needed for manufacturers to push production with little concern that prices will drop, leaving them holding high-priced inventory. High milk prices also provide dairy farmers with the incentive to push production as much as possible.

March dairy cattle slaughter totaled 246,000 head. This was 9,000 head more than February (a short month), but down 28,000 head from last year. This is the lowest monthly slaughter based on a 30-day month since June 2013. Cows are being held on to as record milk prices are becoming somewhat normal. Replacement heifers are in good demand, but somewhat difficult to find, limiting the increase of cow numbers in the nation’s herd. This desire is not going to go away as long as milk prices are high and feed prices reasonable.

One dairy product that bears watching is Grade A nonfat dry milk. Prices took charge during the second half of 2013, with an increase of 47 cents per pound. Demand was high and supply was tight. But high price did what it is supposed to do, and that is limit demand or increase production or both. Price has now declined 30 cents from the high as demand slowed and inventories are building. The nonfat price on the daily spot market has now declined to the lowest level since Sept. 5, 2013. Discounts are being offered in some instances in order entice buyers and move some inventory. With Grade A nonfat dry milk price leading the charge on the way up, one needs to be watchful over price weakness being a forerunner of what may come.

I continue to recommend fence strategies consisting of purchasing put options near where futures are trading and selling call options $1.50-$2.00 above the market. For those with no desire to deal with potential margin calls, a put spread strategy may be the next best option. This consists of purchasing a put option near where the market is trading and selling a put option $1.25 below. This reduces the cost of the premium, limits downside protection to the level of the sold put option, and also leaves the upside open. If milk prices decline, some price protection will be accomplished. This strategy is one that is better than doing nothing.

Upcoming reports:

  • Agricultural Prices report on April 30
  • April Federal Order class prices on April 30
  • March Dairy Product Production report on May 1
  • World Agricultural Supply and Demand report on May 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. The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. 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.

Which Way for Dairy Prices as Milk Output Grows?

Apr 14, 2014

Hedging decisions aren’t easy when greater milk per cow and tight heifer supplies play out against wavering cheese prices and strong dairy demand.

USDA was optimistic on the latest World Agricultural Supply and Demand report, and rightly so.

High milk prices will increase the desire to improve milk production as much as possible. USDA’s current estimate of 206.1 billion pounds is 3.9 billion pounds over last year and 9.9 billion pounds over 2011. There has been an increase in cow numbers of around 15,000 head since 2011 nationwide, but current inventory is running below last year.

We can clearly see that milk production per cow has made a significant improvement. In fact, production per cow per day is about 1.3 pounds more this year in comparison with 2011. Per-cow milk production has increased 15.1% over the past 10 years. Now, with record high milk prices and the outlook for a good year ahead, according to USDA, one can expect that milk production may improve at a more rapid pace. Of course, there are many things that will be a factor in milk production growth, but, under average circumstances, production could exceed the current USDA estimate.

There is increasing demand for replacement heifers, which are currently in tight supply. Prices have raised the desire to fill barns, causing buyers to scour the countryside for anything available. There was a period of time when cull prices were higher than live prices, so some heifers were showing up for slaughter due to better returns. This has left a bit of a void in the market at the present time.

Despite the recent decline in cheese prices, with blocks moving to the lowest level since Feb. 21, they’re not expected to continue to drop. Buyers will step back up to the plate to pick up supply for later demand. Inventory has been unable to increase for the first two months of this year, and indications are that March inventory did not improve either. Increasing cheese production from greater milk volume as the calendar moves through spring flush may swing the pendulum, but the inability to increase supply will keep support in the market. Dry whey price is also providing good support. Weekly Agricultural Market Service (AMS) prices indicate dry whey is currently just over 67 cents per pound and the highest level since Jan. 2012.

Class III futures traders anticipate cheese and whey prices to decline as the year progresses. Futures months carry a discount with December holding a discount of around $5.50 from April. This has made it difficult making hedging decisions. Typically, the futures carry a premium in the later summer-early fall months due to that being the time of greatest demand as buyers prepare for school and holiday demand. The market seems to feel that greater milk supply will be forthcoming and sufficient supply of milk and dairy products will be available when late-year demand is present.

My recommendation is to purchase a put option spread for the last half of the year. Purchase put options close to the current underlying futures price and then sell put options $1.25-$1.50 lower to help pay for it. This will give limited downside protection to the level at which the put option was sold, but will leave unlimited upside potential. There is no margin money required with this position.

Upcoming reports:

  • GDT auction on April 15
  • March Milk Production report on April 21
  • March Cold Storage report on April 22
  • March Livestock Slaughter report on April 23


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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