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October 2011 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.

On the Dairy, In the Market: Two Separate Camps?

Oct 31, 2011

Against a backdrop of falling milk prices and high feed costs, cow numbers and production continue to increase.

 
Time stands still for no one, and the calendar has moved forward to November. The window for filling orders for the holidays is closing. Sure, there will be some fill-in orders that will need to be met, but, for the most part, cheese has already moved to packagers and recutters for gift boxes and other specialty items. Retailers mostly have stock on hand or have placed orders that will be filled shortly.

Schmahl to Join Risk Management Panel at Las Vegas Conference


Register now to hear Robin Schmahl speak Nov. 8 at Dairy Today's Elite Producer Business Conference in Las Vegas.

 
 
Most years, cheese and butter prices decline during the last part of the year after year-end needs are filled. Buyers limit their purchases for inventory until either the price is right or the New Year begins. What this means is that buyers become less aggressive, most often resulting in lower prices.
 
We have already experienced lower prices since the record high set in August. Milk prices were good, but feed prices were high, challenging profitability. Fortunately, as cheese prices declined -- taking milk prices down with them -- grain prices also fell. According to USDA’s latest World Agricultural Supply and Demand report, milk price are expected to be more than $2.00 lower than this year. We can only hope grain prices will remain lower as well or it will be a very difficult year. Feed needs should have been hedged with the price decline to guard against strengthening prices.
 
Despite the relatively poor milk/feed ratio seen for quite some time, milk production continues to increase. The September “Monthly Milk” production report showed U.S milk production up 1.7% at 15,803 billion lb. Milk production has been higher than the previous year for 20 consecutive months. This is incredible considering some of the low milk prices experienced last year.
 
Production per cow continues to increase, with production up 12 lb. per head from a year earlier with 88,000 more head than a year ago. Of the top 23 states, only four states posted a decline from a year earlier. The states of Florida and Texas showed the most increase on a percentage basis, up 11.3% and 10.1%, respectively. Ironically, these states seemed to suffer the most from drought and heat this summer. 
 
Despite relatively high culling rates, the nation’s dairy herd continues to grow. September dairy cattle slaughter totaled 247,000 head, up 4,000 head over the previous month and 2,000 head more than last year, according to the “Livestock Slaughter” report. The dairy herd however, was 101,000 head larger in September than it was a year earlier. It was also 1,000 head larger than August for the 23 selected states. 
 
Upcoming reports:
-          Dairy Products report on November 1
-          Fonterra action on November 1
-          California 4a/4b prices on November 1
-          October Federal Order class prices on November 4
-          World Agricultural Supply and Demand report on November 9
-          California Class I price on November 10
-          Fluid milk sales report on November 11
-          Fonterra auction on November 15
 
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.

Take the Opportunity to Hedge Feed Prices

Oct 17, 2011

Milk prices have been good. But think of the volatility we could experience, especially as next year rolls around and production becomes more critical to ensure we do not run out of corn.

 

September was a brutal month as far as Class III futures prices are concerned. Contracts fell almost on a daily basis with only a few brief rallies, know as a "dead cat bounce," taking place.

Traders became bearish as their perceptions of price potential dimmed. The October contract fell $1.18, November declined $1.97 and December declined $1.66 for the month. Contracts for the first half of 2012 declined as well, but not to the extent these three contracts did. Second-half contracts for next year remained fairly stable.

This bearishness in milk was not completely the result of a significant decline in cheese prices. For the month of September, blocks fell 7 cents while barrels lost 9 cents. Another factor involved in futures prices falling was the elimination of some of the price premium that had been kept in the market. Seasonally, September or October is our highest price and/or demand month. High feed prices were expected to tighten milk supply as higher culling and/or lower-cost rations were expected to impact milk output.
 
Milk prices have been good overall this year with Class III prices for the first nine months averaging $18.28. However, high feed prices have impacted income over feed costs, leaving us not much better than a year earlier. One thing we can be thankful for is that milk prices and feed prices have kept pace with each other to some extent. Some areas of the country experienced very high corn prices as supply became tight and corn had to be shipped in from a great distance. As harvest is progressing, this should be alleviated somewhat.
 
Grain prices have declined significantly over the month of September and are allowing producers to hedge feed prices for the upcoming year. I mentioned in my previous article that grain prices needed to be watched closely. It appears the markets have bottomed since the beginning of the month and have been sideways to higher. If you need to hedge feed prices, now is the time to get it done.
 
USDA recently released its price and ending stocks projections for 2012 on the World Agricultural Supply and Demand Estimates report. Corn ending stocks were raised from 672 million bushels to 866 million bushels and above the trade estimates. The initial reaction was bearish because stocks were projected to be above expectations.
 
But, let’s face it, ending stocks of 866 million bushels is tight. Ending stocks last year totaled 1.128 billion bushels. There was much volatility over the past year. Think of the volatility we could experience this year, especially as next year rolls around and production becomes more critical to ensure we do not run out of corn. Protecting feed price will eliminate that stress in your life for the upcoming year. Purchase some call options or call option spreads to protect against rising prices. Forward contracting should also be considered if basis is not too wide. This is an opportunity that you do not want to miss.
 
Also on the report, USDA released estimates for milk production and dairy prices for 2012. Milk production is estimated to increase 2.5 billion pounds, totaling 198.4 billion pounds. Taking into consideration potential production and demand, USDA reduced its 2012 estimate for the All-Milk price by another 10 cents to a range of $17.75-$18.65, a decrease of about $2.25 per cwt. from next year.
 
Upcoming reports:
-          Fonterra auction on Oct. 18
-          September Milk Production on Oct. 19
-          November Class I price on Oct. 21
-          September Livestock Slaughter on Oct. 21
-          September Cold Storage on Oct. 21
-          Commercial Disappearance on Oct. 25
-          Agricultural Prices on Oct. 31
 
 
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 it may not be suitable for everyone. Those acting on this information are responsible for their own actions.

Slowing Demand Dims Milk Price Potential

Oct 03, 2011

Milk prices owe their recent decline to the downward movement of cheese and corn as well as increased milk production, diminishing exports and the faltering economy.

Class III milk futures have been following grain prices lower. A chart overlay of December corn and December milk shows nearly an identical pattern: December corn fell $1.75 per bu. during the month of September while December milk fell $1.66 per cwt.
 
Milk futures did not fall simply because corn fell, but that does have an influence. However, milk futures were directly influenced by the price movement of cheese, which is a reflection of demand. The July Commercial Disappearance report, released by USDA last week, showed disappearance of American cheese at 323.0 million pounds, down 9.8% from a year earlier and down 12.6% from the previous month. This is where much of the pressure stems from. Some varieties of cheese are experiencing better demand with supply a bit tighter. Disappearance of "Other" cheese was up 2.3% from a year earlier, but down 3.7% than the previous month.
 
Cheese buyers have been less aggressive lately as orders, although good, have not been good enough to tighten supply. It was thought the demand for milk to fill the school pipeline would have significant impact in light of this summer’s weather-related lower production. However, even though most areas experienced prolonged heat and humidity, milk production remained relatively strong. Production remained above year-ago levels, with the August milk production report showing 50-state milk production up 2.1%.
 
Along with increasing milk production and slowing commercial disappearance, exports have been slowing as well. July exports of American cheese were only 5% above the previous year, but down 19% from the previous month. The economic slowdown both domestically and internationally is certainly having an impact.
 
Butter is also seeing some interesting things happening. All year, butter stocks have been running below year-ago levels, with the industry very concerned over supply. Stocks at the beginning of the year totaled 81.7 million pounds, down 52.0 million pounds from a year earlier and the tightest since 2005. Demand was strong. However, over the course of the first eight months, stocks have increased to a level above a year earlier. August stocks were 10.3 million pounds higher than August 2010. Demand has been good, but not exceptional. Exports have been good, but not exceptional. Production has been strong enough to both meet demand and increase inventory.
 
There continues to be concern over a secondary recession, which would likely have a devastating impact on milk price. The last recession showed Class III milk prices drop below $10.00 for four months before prices began slowly moving to higher levels. The September price was announced at $19.07, already a decline of $2.60 from the previous month. October futures trading are around $17.30, down another $1.77.
 
The question is, How much could prices decline if a second recession takes place? Not the same as last time, I hope, but it certainly could mean significantly lower prices than we currently have.
It is critical that producers watch grain prices. A liquidation phase has been taking place, but this will not last forever. Prices will rebound, as stocks are still relatively tight. Purchasing call options and implementing call option spread strategies are necessary to protect future feed needs.
 
At the same time, any rebound in milk futures prices needs to be hedged. My recommendation is to use fence strategies consisting of the purchase of a put option and the sale of a higher strike call option. These need to be tailored to your cost of production. This strategy does give some price flexibility by allowing you to take a higher price up to the sale of the call option.
 
Along with the use of options to protect both feed and milk prices, RMA has provided funding for LGM-Dairy again. This margin insurance is another tool that can be used to protect your income over feed cost.
 
Upcoming reports:
- Fonterra auction on Oct. 4
- California Class I price on Oct. 10
- World Agricultural Supply and Demand on Oct. 12
- Fluid milk sales on Oct. 14
- Fonterra auction on Oct. 18
- September milk production on Oct. 19
 
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 it may not be suitable for everyone. Those acting on this information are responsible for their own actions.
 
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