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August 2008 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.

Price seasonality has changed

Aug 28, 2008
Robin Schmahl

For years we could anticipate the seasonality of milk prices and get an idea of the months when milk checks would be smaller and when they would be larger. This seasonality changed in 2004.

Prior to that year, the lowest milk prices were generally realized during spring flush and the highest prices in September and October. There were some minor aberrations when prices remained higher through the end of the year, but all in all, a seasonal trend was very prominent.

Over the years, the cash and futures markets have become more volatile causing changes to take place in how buyers prepared for fall and end-of-the-year holiday demand. Buyers changed from purchasing during the summer and fall--to avoid having a large storage bill -- to purchasing inventory earlier and gladly paying for storage. This changed when cash prices were significantly higher in fall, and it was realized that paying for storage was less expensive and less stressful. Buyers could purchase inventory earlier and over a longer period of time to put themselves at an advantage later in the year. This minimized some of the buying frenzy at the end of the year when everyone one was attempting to outbid the other for product.

This new purchasing seemed to be a good idea except that many buyers seemed to think the same way. The result was a market that (most years) was having the high price during spring flush and a lower or steady price during the September and October period. In 2004 the high price took place in May. In 2005 the highest price was in April, and 2007 posted the highest price in July. The highest price in 2006 took place in December following a whole year of fairly steady prices.

The effect that early buying has on the market is that buyers become more aggressive when milk production is heaviest, pushing prices higher. Then, when demand seasonally increases in fall they already have much of their projected needs already on hand. This takes away the aggressive buying and results in higher prices that we would normally experience in fall.

This year is setting up for the same price pattern. Buyers aggressively purchased cheese early trying to fulfill orders and establish a cushion for later in the year, which resulted in high prices during June. Manufactures limited production to orders and diverted milk to butter/powder manufacturing. They did not want to produce extra cheese at high prices and risk holding inventory in a falling market, resulting in a self-induced tight market. However, the economy slowed and milk and cheese began to be pushed back to manufacturers causing inventories to grow. Cheese began coming to the cash market more heavily, pushing prices lower. Buyers have been taking advantage of this good fortune and purchase everything that is coming to the market without having to fight over it. This activity will likely minimize a buying frenzy in September and October as cheese will already be in position to fill holiday orders. If this continues for a few more weeks, we may not see any price rally the rest of this year. Judging by commercial disappearance numbers and Class III futures, the high has been set for the year.

Grain prices have declined significantly over the past two months. Corn price has dropped more than $2.20 per bushel, soybeans more than $4 per bushel, and soybean meal more than $95 per ton. This is providing the opportunity we were hoping for to hedge some feed for next year. Price is not as good as it was last year, but significantly better than it was two months ago; especially in light of the milk price decline we are seeing.

You need to take advantage of this break to get at least half of your expected feed requirements either forward contracted or hedghed using the futures and options market. You need to protect what you can for the end of this year and next year. Do not worry over what you did or did not do earlier this year, but look ahead. Your goal will never be achieved by looking back.

Upcoming reports to watch for are the July Cold Storage report on August 22; the July Livestock Slaughter report on August 22; the September Advanced Class I federal order price; and the August Agricultural Prices report on August 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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

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