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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.

Corn-Crop Complacency Is Not a Virtue

May 24, 2013

The corn crop is not yet in the bin. Dairy farmers and livestock producers need to be concerned about the growing season ahead.

Concern began to develop weeks ago as corn planting progress was drastically behind the five-year average and the slowest on record. This raised concerns over crop production and the potential for higher corn prices. Current corn prices are already high with cash prices generally above futures prices in most areas.

After a week showing record corn planting progress, most of those concerns have been put on the back burner. There are areas in which planting will remain behind, with some acres possibly switched to another crop or not planted at all. However, this does not seem to concern the market at this time as those areas are not the main focus of traders.

We may have been able to plant a lot in a week’s time, but there is concern over the progression of the crop, with emergence now significantly behind. It will take exceptional weather for the crop to catch up to the historical average. The current focus is on planting, with little thought given to the rest of the summer at this point. That is understandable as rain coverage over the past few weeks has improved soil conditions in many areas, also eliminating much of the concern carried over from last year.

Dairy farmers and livestock producers still need to be concerned as there is a lot of growing season to move through. The crop is not yet in the bin. The corn price a year ago was virtually at the same level it currently is for the new-crop December contract. One only hopes we do not see a repeat of last year and that good crops are produced with ample carryover keeping feed and food prices manageable.

What happens to grain production will have a large impact on milk production. Milk prices will generally follow corn prices. A lower corn price will spur greater feed demand, thereby improving milk production. The opposite is also true. However, this may not be as closely correlated as it has been. This past year taught farmers new things when it came to maintaining milk production during a higher feed price year. Many alternative feed sources and products were tried in the effort to reduce cost while yet maintaining milk production. Rather than abandoning these alternative feeds and ration mixes, what was learned needs to become a part of the business plan of the operation. Even in a plentiful year of grain, the milk/feed ratio for any operation may be improved with the use of some alternative feeds.

Even in adversity, farmers can get the milk from the cows. Milk production in April moved higher than last year by 0.2%. There were just two months showing lower production than a year earlier. This is incredible, given the tight margins experienced in the past year.

One has to wonder what this year will bring. USDA already anticipates record milk production. If estimated production is reached, it would be the fourth consecutive year of record milk production. Production has exceeded the previous year 14 of the past 16 years. Over the past five years, milk production has increased 14.7 billion pounds, or 7.9%.

My recommendation is to purchase call options or call option spreads to protect expected feed needs for the coming year. If grain prices increase from weather problems such as they did last year, this will certainly improve profitability. Purchase at-the-money calls and sell calls 70 cents higher for a net cost of 22 cents. Purchase $5.50 calls for 30 cents by themselves to provide unlimited price protection.

Upcoming reports:

- May Agricultural Prices report on May 31
- California 4a/b prices on May 31
- Dairy Products report on June 4
- Global Dairy Trade auction June 4
- World Agricultural Supply and Demand report on June 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 that may not be suitable for recipients of this publication.

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