Jul 23, 2014
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June 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.

Confidence Builds for Strong Milk Prices

Jun 23, 2014

Here’s what’s leading traders to eliminate the discount that futures contracts have held in anticipation of a price decline.

Trader’s attitudes have changed over the past week or so as portrayed by Class III futures contracts. Since late last year, subsequent futures contracts have carried a substantial discount to the underlying cash and front-month contract. Record milk prices have been viewed with trepidation and the idea that high prices will cure high prices.

Historically, high prices have always resulted in a rapid price decline and, most often, faster than the time it took for prices to increase. That sentiment has been prevalent as record milk prices have come and gone earlier this year. However, the prevailing attitude seems to be that cash prices have settled into a range. This resulted in futures contracts through September moving in close proximity to each other. Gone is the discount once held in each subsequent month in anticipation of a price decline.

Despite increased cheese production, prices seem to be content in the vicinity of $2.00, with buyers and sellers doing business as needed. Overall demand is good, with extra moving to inventory. Cheese manufacturers seem to be mixed in their approach to current cheese production. While some desire to pick up the discounted milk available and are keeping plants running at capacity, others are limiting intakes to keep production in line with demand.

Although cheese stocks are behind year-ago levels, they are not as concerning as butter stocks. However, the same diverse ideas are prevalent. Some plants are running at capacity while others have opted to sell a portion of their cream supply to capture good prices while keeping production in line with demand. It is unlikely butter inventory will come anywhere near last year’s level by the end of the year. Although export demand is slowing as a response to continued strong prices, domestic demand remains good, making it difficult for inventory to increase to any great degree. This is a significant concern for the butter industry, keeping good price support under the market.

Demand and inventory of cheese and butter, as well as a strong whey price, are giving traders confidence to virtually eliminate the discount that futures contracts held for quite some time. It is normal for futures contracts to actually hold a premium to the underlying cash, with September and October seasonally posting the highest prices of the year. This reflects the greatest demand time as buyers are looking forward to expected demand through the end of the year.

The burning questions are: How much growth in milk production will be realized through the end of this year? How strong will demand remain? We continue to see the desire of dairy producers to increase production in response to high milk prices. May milk production showed the greatest gain this year with an increase of 1.4% nationwide. Dairy cattle slaughter declined to 209,000 head, the lowest monthly slaughter in three years. We can definitely see the desire is there to capitalize on good prices. It will be up to the international and domestic consumers’ willingness to dig deeper in their pockets and continue to purchase dairy products at higher prices.

Upcoming reports:

  • May Cold Storage report on June 23
  • June Agricultural Prices report on June 27
  • Planted Acreage report on June 30
  • Quarterly Stocks report on June 30
  • June Federal Order class prices on July 2
  • Dairy Products report on July 3


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.


 

Are U.S. Dairy Prices Influenced by World Prices?

Jun 09, 2014

Robin Schmahl points out how--and why--cheese and butter have defied the correlation to world prices. Will those prices align again?

Volatility is alive and well in both daily spot trading at the CME Group as well as futures contracts. The week after Memorial Day showed substantial price swings, with some futures contracts nearly limit up one day and then limit down the next. Underlying cash is the driver of the market, with traders reacting to daily spot price movement rather than trying to anticipate long-term market direction.

There is a strong feeling that milk prices will remain supported the rest of the year. Demand has been--and is--strong, with inventory of various products not growing as much as anticipated. A real concern has developed for butter, with the latest cold storage report showing stocks 44% lower than last year. This is one of the main reasons why butter price moved to $2.30 at the end of May, 6.50 cents below the record high set in 2004. Demand needs to slow allowing stocks to build to a more comfortable level. The way to slow demand is to increase price. This has had an impact with some reports indicating slowing of export interest as well as domestic demand.

It is interesting to see how cheese, and more importantly butter has, in essence, defied the correlation to world prices. The past eight consecutive Global Dairy Trade (GDT) auctions have shown a decrease of the trade-weighted average price. However, U.S. prices seem to be affected very little by the price weakness. One could conclude that what happens on GDT auctions does not have much, if any, influence on domestic prices.

That currently appears to be the case. U.S. cheese and butter prices historically have run below world prices in order to remain competitive. However, since late last year they have been running higher than GDT prices. Export demand has been strong for our products with April exports of cheese up 32.1% and butter exports up 105.2% above a year ago. Increasing world demand has had buyers scouring the globe looking for dairy products to meet that demand. So the assessment needs to be made whether GDT auction price are a barometer of world prices, but yet have little impact on our high-quality dairy products or if a historical comparison is still in order.

One need not look too far to see how world demand impacts prices. Export sales and shipments of grain have a profound impact on prices. Traders watch and evaluate these reports weekly to get an idea price strength or weakness and competitiveness in the world market. I do not think dairy is much different. The difference is that we are dealing with a more perishable food source.

I want to look at the comparison of butter and cheese. Butter price on the Feb. 14 GDT auction was $2.15/lb. The latest auction price was $1.65. Also on Feb. 14, cheese price was $2.24/lb., while now it is at $1.92. Cheese price is significantly closer to world price but still running above, which is historically unusual. However, there is a large aberration between U.S. butter price and world butter price. This has been holding longer than I had expected, but will eventually correct.

I believe it will be only a matter of time before world prices and U.S. prices realign themselves again. My hope is that world prices will improve, leaving U.S. prices stable. However, it seems that the desire is to slow demand and build stocks for greater cushion through the end of the year.

Upcoming reports:

- World Agricultural Supply and Demand report on June 11
- May Milk Production report on June 18
- Federal Order Class I price on June 18
- May Livestock Slaughter report of June 19
- May Cold Storage report on June 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. 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.

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