Jul 13, 2014
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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.

Lower Milk Prices May Not Mean Less Profitability

Jul 07, 2014

The market is weighing the impact that high prices may have on demand as well as how much milk supply will be available.

There is much speculation on whether the top is in for milk prices. Seasonally, one would have to say that it is not. Higher prices generally are seen in September and October. However, this year, such may not be the case.

Record milk prices were seen in April and have declined marginally since. Current futures contracts hold a discount through mid-2016, with prices hovering at $15.85. That certainly is not a very positive outlook for milk prices. Current fundamentals are mixed as to what the last half of the year will bring. Good demand continues to support the market with tighter stocks than desired heading into the time of year when demand increases as buyers look forward to expected later year demand.

Market participants are trying to weigh the impact high prices may have on demand as well as how much milk supply will be available. Feed prices and availability do not seem to be an issue this year if current weather patterns hold. Weather forecasts do not indicate a heat dome or extreme heat through the Midwest in the foreseeable future. Dairy farmers are interested in increasing milk production as much as possible to take advantage of high milk prices and profitable income-over-feed costs.

Despite good demand around the world, world prices continue to weaken. The latest Global Dairy Trade auction showed another decline in overall price, making it the ninth decline over the past 10 trading sessions and the lowest trade weighted average since Feb. 9, 2013. This will have an impact on U.S. prices and already has. It has not yet been overly negative due to previous export orders being filled from contracts made earlier in the year. More impact may be felt soon as these contracts are filled and new orders need to be placed. USDA indicated in its weekly Dairy Market News publication that international demand has slowed for both cheese and butter due to high prices. Butter is primarily the one category that may feel the greatest effect as the U.S. price is about $1.00 per pound above world price.

The recent decline in milk futures indicates traders feel cheese prices may have a greater difficulty moving back above $2.00 again. That is the reason futures declined substantially during the first week of July. Contracts through the end of the year declined nearly $1.00 per cwt., which may be difficult to regain.

It does not seem milk prices will fall out of bed, but lower prices may be on the horizon. One thing we must keep in mind is that lower milk prices with lower feed prices will not be quite as hard to swallow, but milk checks will not be as good as they had been. Price fluctuations are the nature of the market as supply and demand factors unfold.

My current hedging recommendations are the same as they had been the past three weeks, and that is to establish put option spreads consisting of buying at-the-money puts and selling puts $1.25 below the market. This provides limited downside protection while allowing upside gain. It requires no margin other than the option premium. This strategy provides substantial flexibility while also providing some protection.

Upcoming reports:

- World Agricultural Supply and Demand report on July 11
- June Milk Production report on July 18
- June Cold Storage report on July 22

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He can be reached at 877-256-3253 or through his 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.

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.

Why Can’t Milk Compete?

May 23, 2014

While dairy farmers pay 15 cents per cwt. to increase demand for dairy products, milk sales decline and competition from other beverages surges.

U.S. consumption of fluid milk has been steadily declining for quite some time. In fact, consumption of total fluid milk products has been on a nearly steady decline since 1945.

At its peak, per capita consumption of fluid milk products reached 384.2 lb. It has been all downhill since then with consumption less than 195 lb. at present. This has been a concern and remains a concern not only for the dairy industry but, more importantly, the health of the nation.

Now, this is not all gloom and doom, and I do not intend it to be. The decline in fluid milk consumption has been more than offset by an increase in per-capita consumption of cheese and, recently, the surge in yogurt consumption. Per-capita total cheese consumption had tripled since 1970, reaching nearly 34 lb. Add to that steadily increasing export demand, and the decline in fluid milk consumption is not quite so depressing.

So, why the decline in fluid milk consumption? Dairy farmers are paying 15 cents per cwt. for the purpose of increasing sales and demand for dairy products. But why the lower trend of fluid milk consumption? I guess the best explanation is "competition." There are so many beverages available to consumers with more being developed. Back in 1945, soda was considered a luxury by many with milk being more of a staple. There were many small family farms with milk readily available for consumption right at the farm. Now, there are literally isles of soft drinks, sports drinks, juices, and teas available in many flavors.

There are beverages for those who like it spicy. There are beverages for those who want more energy. There are beverages for those who need quick rehydration, and there are beverages for those who want fiber, probiotics, and/or anti-oxidants. There are fluid drinks that are virtually a meal in themselves. On top of this, packaging is very appealing. Innovation in packaging for milk has improved, but consumers still look at milk as a beverage for certain applications and certain times of the day.

Today’s beverages are being produced that carry many of the nutritional qualities of milk and more with a longer shelf life. Milk is best consumed when it is cold. Once it warms to room temperature or above, it losses much of its appeal and if left too long will begin to sour. However, many other beverages are consumed at outside temperature over a longer period of time such as during bike rides, hiking trails or long rides in the car without the same effects. I am not against other beverages and consume them myself, but I love a cold glass of milk and the nutritional benefits of milk are second to none.

Demand for dairy products continues to increase both domestically and internationally providing good demand for the milk we produce. Exports continue to run substantially higher than last year with the latest export report for the month of March showing cheese exports up 36.9% over last year. Cheese exports for the first quarter of this year were 46.5% above the same period last year. Butter exports have been incredible with first quarter exports up 109.0% over the same time last year.

So, despite reduced fluid milk consumption, there are many good things happening in the dairy industry. Increasing world demand provides a positive outlook for milk prices in the future.

Upcoming reports:

  • Agricultural Price report on May 30
  • California 4a & 4b prices on June 2
  • Dairy Product Production report on June 4
  • May Federal Order class prices on June 4


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 Margin Protection Plan Is Not a Cure-all for Marketing

May 12, 2014

Should you commit to the new farm bill program for dairies, or avoid it? Plus, a closer look at the cheese market.

Cheese prices have fallen further than many had expected for this time of year. The price decline was swift, with buyers purchasing on an as-needed basis but waiting for lower prices. There was a feeling that cheese prices would be able to hold above psychological support of $2.00 and, so far, that has been the case. Prices came near that level, increasing buyer interest with the desire to take advantage of lower prices.

Purchasing still seems to be on an as-needed basis. Increasing cheese production has allowed for cheese to move to inventory, lessening the concern of tight supply for the time being. Despite lower inventory than last year, buyers see sufficient supply for the next few months. Schools will be closing over the next few weeks, allowing for greater milk volumes to move to manufacturing. It is unclear as to the extent of milk output over the next few months. New forage supply could provide a boost to milk production.

Farm bill chatter has slowed, with a few items still unclear as to how they will be implemented or what the final provisions will be. In the case of the Margin Protection Plan (MPP), the key feature is to move from a safety net for the price of milk to the margin between milk and feed costs. This milk income over feed costs will be determined by the difference between the national average for milk or the All-Milk price and the cost of corn, soybean meal and alfalfa hay price. It is interesting to note that the milk/feed ratio calculation that we have been using for years will be changed for the purpose of the Margin Protection Plan.

The milk/feed ratio is based on the average price of corn, soybeans and alfalfa hay prices released by the USDA at the end of each month. The actual calculation consists of the All-Milk price minus the prices of 51 lb. corn, 41 lb. of alfalfa hay, and 8 lb. of soybeans. For the month of April, this equated to an income over feed costs of $15.05.

For the purpose of the MPP, the calculation will be the All-Milk price minus the price of corn times 1.0728, soybean meal price times 0.00735, and the price of alfalfa hay times 0.0137. This equates to an income over feed costs of $13.83. The good thing about this is that it reduces the income over feed costs by about $1.20, providing for an earlier level of protection compared to using the current milk/feed ratio calculation.

There is one aspect of the calculation of which I am not completely sure. Soybean meal price is not recorded on the monthly "Agricultural Prices" report. The price used for this calculation will be determined by the Central Illinois soybean meal price as reported by the Market News Service of the Agricultural Marketing Service. It is unclear whether the calculation uses the price by rail or by truck. These prices are not too much different, but using one or the other will make a slight impact on price calculation.

Your decision will be whether you want to commit to the program and choose a margin protection level between $4.00 and $8.00 or whether you will stay out and utilize some other form of market protection for your margin.

I encourage producers who choose this program or the Livestock Gross Margin for Dairy (LGM-Dairy) program to not solely rely on it for price protection. It will not protect against a decline in milk prices. The milk price could decline, reducing profitability while still leaving you out of getting a payment from either program. After all, the current income over feed costs of $13.83 for April would need to decline more than $5.83 before any payment would be received, if the highest deductible would be chosen minus the cost of implementation. This would reduce profitability substantially.

Use put option spreads consisting of the purchase of at-the-money puts and selling puts $1.25 below that level to reduce cost. This provides some downside protection while leaving the upside open. There is no potential for ongoing margin calls with this position.

Upcoming reports:

  • Livestock, Dairy, and Poultry report on May 15
  • April milk production report on May 19
  • GDT auction on May 20


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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