Oct 1, 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.

Is the Pendulum Swinging on Cheese and Butter Supply?

Sep 29, 2014

Dairy farmers can give some thanks to processors for high milk prices this year. Here’s why.

Dairy farmers can give some thanks to processors for high milk prices this year. Yes, exports have played a large role in supporting prices as world demand built to a crescendo late last year and early this year. International buyers came to the U.S. market to satisfy demand and contract supply for much of this year. More emphasis was placed on satisfying international demand than on building inventory. The result has been very high prices for much of the year with new records being set.

The downside of these high prices was that some manufacturers during part of the first half of the year were trying to limit production to the orders being placed. They were unwilling to build inventory to avoid the possibility of prices to decline. The combination of good domestic demand, strong international demand, and strong dairy product prices throughout the year did not provide the market with lower prices during which strong cheese and butter production is put into inventory without reservation. After all, seasonal price swings offered the opportunity to purchase extra milk most often at prices under class. Heavy manufacturing schedules during these times and the moving of extra manufactured products into storage was rewarded by seasonally higher demand and higher prices.

The reward was a good return on stored product as well as the ability to readily meet seasonal fall and winter demand. However, such was not the case this year. The lowest spot cheese price was $1.9475 and butter price was $1.54. Butter set the lowest price for the year on the first trading day of January and never looked back nearly doubling in price. Cheese traded in the range of about 50 cents spending limited time below $2.00.

So, it appears that some of the tightness in supply and lower inventory has been the result of continued high prices limiting the desire of manufacturers to produce cheese and butter unless there were orders for the product. In some way you could say it was a self-induced tightness.

Prices have been such that this idea continues with some manufacturers limiting production to demand. It seems as if the only way to alleviate this tightness and promote the building if inventory is for prices to decline. Lower prices will generally increase the desire to store while high prices generally increase the desire to quickly move what is produced rather than risk holding inventory that might loose value if prices decline. .

Interestingly enough is the fact that the past two cold storage reports have shown a slight increase in American cheese stocks. An increase from June to July is not unusual with increases seen about half of the time. It is unusual for American cheese stocks to increase from July to August. That is what took place this year and was the first time since 1985.

What is taking place is that previously contracted orders from cheese and butter have been filled in the international market and product that was destined for the export market has been and is being turned back and absorbed into the domestic market. In the case of butter, not only has international demand slowed, but imports are coming in at a greater pace than usual. This is currently being absorbed, but is beginning to swing the supply pendulum in the other direction.

Upcoming reports:

- Agricultural Price report on September 29
- Quarterly Grain Stocks report on September 30
- Dairy Products report on October 3
- World Agricultural Supply and Demand report on October 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. 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. 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.

Futures Contracts for 2015 Show Less Optimism

Sep 15, 2014

Outside factors are becoming more negative to sustained high milk prices.

There is a growing bearishness for 2015 milk prices being exhibited. For much of the summer, Class III milk prices have been hovering around the $18.00 price level or higher, posting little change for the yearly average from week to week.

However, that has changed over the past week or so. Only the January futures contract now remains above $18.00 for next year. Many of the other contracts have declined nearly 50 cents despite rising cheese and butter prices. This puts most Class III futures contracts for 2015 more than $6.50 below the current price expected for this month.

Due to the method of calculating price for the Federal Orders, the September contract is virtually priced and will move very little from now through the settlement date of Oct. 1. Thus, we are looking at a record high Class III milk price for September. Later, contracts are susceptible to underlying price movement as was experienced last week when October and November posted limit down price moves one day, not because of cash price weakness, but because of the perception that cash prices might be nearing a threshold at which buyers may not bid higher. Outside factors are becoming more negative to sustained high milk prices.

Milk prices have remained stronger for a greater length of time than anyone had anticipated in the face of steadily declining world dairy prices as well as steadily declining grain prices. There are a few exceptions, with soybean meal being one of them. Tight soybean supply and crush rates have resulted in continued high soybean meal prices with strong premiums over cash. With the September contract now history and October soybean meal futures $70.00 per ton lower and a large crop on the verge of being harvested, meal prices should decline. In fact, there is a strong possibility soybean meal futures may fall to $300 per ton or below by the time the harvest is in and the bins are full.

Milk production has increased substantially as indicated on the July milk production report, with some analysts expecting continued growth of around 4.0% for the rest of the year. Increasing cow numbers and production per cow will fill the milk pipeline. This is being readily absorbed right now as demand is high, and stocks of dairy products are lower than desired. This created the market frenzy we are experiencing as buyers are purchasing to fill orders and build supply to satisfy customers. This will come to an end as end-of-the-year holiday-buying slows and supply becomes more readily available. That is what the futures market is currently reflecting: a time when supply will exceed demand. What the futures market is showing is a hard pill to swallow.

If current milk futures are a reflection of where milk prices are headed next year, then there will be a substantial reduction in income over feed costs. It will still be profitable due to declining grain prices, but the balance sheets will be tightened.

This brings up the subject of the Margin Protection Program available through the farm bill. It certainly looks as if there is a strong possibility of payments being received depending on the level that is chosen for coverage in 2015. So, it is a good idea to sign up for the program now in order to get in the system at your convenience and then chose your level by the end of November when there may be a clearer picture of price potential.

But do not use this program as the only method of income protection. It pays only when the national income over feed cost falls below the level you choose. It does not protect milk price. It protects margin. Milk price could fall and grain price could fall and you still may not be paid at the income over feed cost level you choose. The Margin Protection Program and marketing need to be used in conjunction with each other to enhance profitability.

Upcoming reports:

- October Federal Order Class I price
- August Milk Product report on Sept. 19
- August Cold Storage report on Sept. 22
- August Livestock Slaughter report on Sept. 25
- September Agricultural Prices report on Sept. 29

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.

 

High Prices Cure High Prices, But What about Butter?

Aug 29, 2014

Butter has really been the star of the show with a new all-time record high price established at $2.8225 on Aug. 22.

There are increasing discussions as to what the future holds for dairy prices at the end of this year, but primarily discussion is focused on next year.

Many producers are hard pressed to find a reason to hedge milk prices next year due to the substantial price discounts seen in milk futures contracts. The pattern for much of this year has been that cash prices have remained strong, requiring futures contracts to increase substantially as discounted futures needed to converge to cash. How long this pattern will continue is anyone’s guess, but we can be assured it will not last forever.

It has been a good year so far, and it will potentially remain that way through the end of the year. Demand is strong for dairy products and the push now is for obtaining enough to fill expected demand through the end of the year. Buyers are reluctant to purchase hand-to-mouth in the anticipation that prices may settle back somewhat before the end of the year and thus remain aggressive. Supplies are being purchased and forward contracted through the end of the year to make sure customers are taken care of.

Butter has really been the star of the show with a new all-time record high price established at $2.8225 on Aug. 22, 1.25 cents above the previous record set in early September 1998. Demand has been strong, especially in the export market. Exports rose nearly 42% during the first half of this year. Most of the business was the result of forward contracts being inked late last year and early this year due to U.S. price being lower than world price and very competitive. The U.S. Dollar was also lower helping to spur international interest.

Butter supply was initially forecast to increase due to butter production being projected to rise about 1%. However, manufacturers did not follow their usual pattern of aggressive churning, resulting in increasing supply. Manufacturers were aggressively producing 82% butter for the export market while keeping production in line with domestic demand. The desire was to produce what was ordered and little more as they attempted to keep plant inventory minimal.

The surge in exports and strong domestic demand resulted in butter stocks lower than desired, creating a grave concern that turned into buyer frenzy. Supply needed to be purchased whatever the cost and one company outbid the other to get it. Some in the industry believe price is way too high and may result in the loss of market share. We know our exports, although good, have been slowing. Exports in the second quarter have declined 35% from the amount posted in the first quarter. The Foreign Agricultural Service will release July export numbers early in September, giving us a good indication of the impact from high butter price and the increasing U.S. Dollar.

It is interesting to note that the last time July butter stocks were this low was in 2001. July butter stocks this year totaled 170.2 million pounds with the August price setting a new record. Butter price in August 2001 reached $2.2250, with July butter stocks at 112.3 million pounds. While making the same comparison to the previous price record set in 1998, butter stocks in July of that year totaled 51.0 million pounds.

Demand had consistently grown and the bright spot has been the increase of international market share. The industry needs to be careful that we do not sacrifice market share for the sake of the personal preference of larger supply or on the perception that supply will run out even though manufacturing continues. It is a balancing act and one that needs to be accomplished decently and in order.

Upcoming reports:

- August Federal Order class prices on September 3
- July Dairy Products report on September 4
- Milk cows and production final estimates 2008-2012 on September 4
- World Agricultural Supply and Demand report on September 11

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.


 

Good Times for the U.S. Dairy Industry

Aug 18, 2014

It’s all there: increased milk production, higher prices and strong demand.

Both the cheese and butter spot markets have been very resilient, with price dips being short-lived. Demand has been strong and continues to be strong according to the amount of product being traded on the daily CME group spot market. Just last week alone, there were 59 loads of butter traded while price was able to rise 26 cents over the course of the week. Although not quite as many loads of cheese have been traded, activity has been steady with most weeks showing double-digit volumes traded.

There continues to be a disconnect between world prices and domestic prices. Domestic demand is strong as buyers look to satisfy orders for upcoming end of the year demand. Consumers are willing to purchase what they want regardless of price. There seems to be a switch away from the myriads of process and packaged foods available to more of the food staples. Record beef prices have done little to slow demand. Strong dairy prices are experiencing the same thing. Demand is good and supply is less than desired for this time of year.

Milk production continues to improve, with production this year expected to reach a record 206.0 billion pounds, up 4.8 billion pounds from last year. In fact, milk production has exceeded the previous year in 15 of the past 17 years. The two years showing a decrease from the previous year were 2001 and 2009.

With increasing milk production, we have naturally seen an increase in cheese and butter production. This stands to reason as fluid milk consumption continues to decline on a yearly basis.

So, where has, and is, the greatest growth in cheese production taken place? Over the past years, the Western and Central regions have been battling it out for greatest growth in production. The Central region still continues to outpace the West with 45% of the nation’s cheese being produced, compared to 42% in the West. One would think that higher milk production would also be the case in those areas, but that is not the case. Last year, milk production in the West and Central regions ran neck-and-neck at 42% of the nation’s milk in each region.

Butter is a different story as the West far outpaces the Central region by 13%. The West supplied 52.0% of the nation’s butter last year. However, despite increased butter production last year, demand grew at a greater pace. Export demand increased substantially, resulting in the inability of inventory to keep pace with the previous year. Current butter inventory is 40% below last year and the reason price reached $2.66 per pound last week. Buyers are running scared and have been outbidding each other in the attempt to obtain supply for upcoming demand.

Inventory is expected to slow its descent now that the market has virtually been able to severely reduce export interest, especially in light of the Russian ban on dairy products from the European Union, Argentina, Norway and the United States. This does not affect us directly, but will indirectly over time. The U.S. has not exported any dairy products to Russia since 2010 due to certification issues. However, a backup of dairy products in the other listed countries will result in lower prices and the desire of those countries to move more product to different areas of the world.

So, with lower prices in the world compared to our high price, one has to assume that U.S. export business will slow as Argentina, the European Union and Norway move product to other areas of the world. This will eventually allow more to be available domestically and will reduce our market share. This business will be difficult to get back again as we have seen in the past. Right now, the market is focused on our tight supply and reduced inventory, allowing prices to remain high for the time being.

Upcoming reports:

- July Milk Product report on August 19
- Global Dairy Trade auction on August 19
- July Livestock Slaughter report on August 21
- July Cold Storage report on August 22
- Agricultural Prices report on August 28
- August Federal Order class prices on September 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. 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.

The Goal is More Milk

Aug 04, 2014

In today's market, strong domestic and international demand is driving the need for larger milk supplies.

The goal of dairy producers is to keep cows healthy and happy so they will produce as much milk as possible.

Large strides have been made over the years in the area of cow comfort and feeding practices. Technology has been, and is being, discovered to enhance and monitor nearly all areas of the dairy operation. It takes money to make money in all business, and dairying is no exception. We know the effects on milk production if cows are uncomfortable. We know the effects if rations are not balanced and feed additives are skimped on because of cost. We know the effects of uncleanliness and poor milking practices. These are what we try to avoid.

One way to increase milk output is to cull low producers and replace them with better genetics and higher-producing cows. This is an ongoing practice on each and every farm as cows need to pay their own way. Over the past few years, culling has been more aggressive as it took more milk production in order for a cow to pay for itself. Skyrocketing corn and soybean meal prices increased the level of breakevens. Profitability was limited or non-existent in many cases. But with increasing cull-cow prices, some of the shortfall in milk income was made up by selling cows, resulting in reduced feed requirements for the herd. Dairy producers did what they had to do in order to pay the bills.

Now, that practice has changed to some extent. High milk prices this year and declining feed prices have improved income over feed costs and profitability dramatically. The first seven months of this year showed a Class III average price of $22.48, a Class IV price of $23.19, and an All-Milk price average of $24.21. All of these are record averages for this time of year and are well on their way to record prices for the year.

So, despite continued high cull-cow prices, high milk prices and low feed prices have reduced breakevens, allowing for more cows to be kept in the herd. We see this trend on monthly slaughter reports released by the USDA. Dairy cattle slaughter in June totaled 199,000 head. This is the lowest monthly slaughter since June 2008 and has shown a steady decline so far this year. At the same time, the overall nation’s milking herd continues to increase, with cow numbers in June reaching 9.266 million head, the most since April 2012. We can clearly see the desire to produce as much milk as possible. In today’s market, this is a necessity as demand is good both domestically and internationally.

What becomes more interesting is when a comparison is made with milk prices and feed prices. In April 2012, when cow numbers totaled 9.271 million head, the All-Milk price was $16.80 with an income-over-feed-cost of $5.21 per cwt. The last time monthly dairy cattle slaughter was this low, the All-Milk price was $19.30 with an income of feed costs of $9.03 per cwt. The most recent All-Milk price was $23.40 with an income-over-feed-cost of $13.81. These statistics show that high milk prices increase the desire to produce more milk to capture better returns while low prices necessitate pushing production and cow numbers for the purpose of improving the size of milk checks.

The dairy industry seems to be in a different posture presently with demand absorbing production, extending the period of time of high prices. How long milk prices will be able to hold at these levels is unclear, but enjoy them while they are here.

Upcoming reports:

- California Class I price on August 8
- World Agricultural Supply and Demand report on August 12
- July Milk Production report on August 19

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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