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October 2013 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.

Milk Prices Continue to Remain Strong

Oct 28, 2013

But how will time-of-year decisions, international demand, dairy product inventories and feed prices affect the months ahead?


Now that the flow of information and reports from the USDA have resumed, both traders and the industry are breathing a sign of relief. There was a sense of the unknown with the lack of information. This is not to say that reports from the USDA are completely accurate, but are putting forth information received from surveys that have been consistent for many years.

Without this flow of information, market analysis was left up to anyone following the industry who had an opinion. Some "backyard" information was presented as the pattern for the country. Any information was scooped up, regurgitated, re-worded and released to those looking for information for decision-making. There was nothing inherently wrong with this as some of this is done anyway when news is sparse. Interestingly, much of this news had little impact on the futures market. Futures contracts traded mostly in line with underlying cash prices and rightly so. That was concrete evidence of what was actually taking place in the country.

The first monthly report that came out of the silence of USDA was the August "Dairy Products" report that had been delayed since Oct. 3. This report showed significant growth in dairy product production and was considered somewhat bearish. Despite hot weather and reduced milk production, more cheese and butter was produced than last year. Total cheese production reached 926 million pounds, up 3.9% over last year. American cheese production totaled 381 million pounds, up 7.9%. Italian type cheese production totaled 386 million pounds, up 3.8% over last year. Butter production in August totaled 136 million pounds, up 4.7% above last year. This certainly was a bearish report from the standpoint of increasing supply. However, this does indicate good demand.

During October, cheese prices have slowly increased improving the outlook through the end of the year. Current cheese prices are a few cents higher than they were in mid-September, which has been somewhat surprising considering the price decline into early October. However, on-hand supplies have dwindled, requiring them to step back into the spot market more aggressively to fill orders. There is sufficient cheese supply available to the market as a whole, with inventories above a year ago; however, demand for fresh cheese is driving the market. Once the needs of buyers are met, there is a possibility of a void under the market and a potential quick decline in price. Time of year may play a large role in lower prices.

Improving international demand has certainly been very supportive to prices. Even though New Zealand’s milk production is running about 5% above last year, world prices have been somewhat steady. U.S. prices have been competitive, bringing increased business to our shores.

My current marketing recommendations consist of fence strategies for the first half of 2014. Purchase the $16.50 put options and sell $18.00 call options for 20-45 cents. Option strike prices may be adjusted to match the premium one is willing to pay as well as the floor price to be protected. Lower grain prices increases the risk of lower milk prices once holiday and end-of-the-year demand is satisfied. There is too much at stake to do nothing.

Upcoming reports:

- September Cold Storage report on Oct. 31
- September Livestock Slaughter report on Oct. 31
- Agricultural Price report on Oct. 31
- September Milk production report on Nov. 1
- Global Dairy Trade auction on Nov. 5
- World Agricultural Supply and Demand report on Nov. 8

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. 

Government Shutdown Affects What We Know about Dairy

Oct 14, 2013

While the lack of reports is leaving us blind about what’s going on across the country, business continues to be done and milk prices see another good month.

The government’s inability to agree on a budget is becoming more ridiculous. The politics involved in this whole situation are making the U.S the laughing stock of the world. Here we are, a democracy with elected officials who cannot work together and come up with a solution for the good of the nation. It is all tied up with party lines, special interest and the positioning for the next election.

Many citizens are furloughed, which is having a growing impact on various areas of the economy. Some goods and services are not being taken care of as usual. Imports and exports of various items and materials are virtually non-existent, resulting in increasing backlogs at shipyards. This has trickled down through many areas of the economy, not only here but the world. This is something that will not be cleared up overnight once a budget is finally adopted.

So far, there is little indication that exports of dairy products have been affected. It is difficult to get an accurate picture of this due to the inability of receiving government reports. If there are no factors that could hinder export demand of dairy products, the hindrance could come from the inability to ship it out as usual. The U.S. does not send a whole boat load of cheese or butter to one place. Products get put on a cargo ship along with other goods. If shipping to a particular country is slower due to reduced inspectors, which could slow the gathering of a full load, it will eventually slow all export movement. However, much of what is purchased for exports generally has a window of shipping time. When CWT agrees to assist in the exports of cheese and butter, it is generally states that it will be shipped over the duration of the next four to six months.

One issue with in the dairy industry is the lack of reports. We have now plowed our way through half of the month of October without the value of any USDA reports. This leaves us blind as to what is going on across the country. Surveys are not being conducted, weekly regional reports are not being released, monthly reports are not being released, etc. Fortunately, the Federal Orders are keeping track of and releasing the weekly National Dairy Product Sales report, providing the industry with critical information for product pricing.

With all of this lack of information, business still needs to be done -- and continues to be done. Trading on the CME spot market has been active, giving traders something to base their trading activity and price direction on. The recent strength in cheese prices has certainly been welcomed as it supports another good month of milk prices. Most of the pricing for October has already been factored in by the trade, with the October futures contract settling into a sideways narrow trading pattern. November will be susceptible to an underlying cash price movement over the next month, making it difficult to predict where milk prices will be. But we do know the current milk/feed ratio is the best it has been since November 2011, and one can only hope the ratio will improve as time moves forward.

Lower corn prices due to better-than-expected yields may translate over into lower milk prices if the historical pattern is followed. Milk production has remained fairly strong despite high grain prices, so one has to wonder how far dairy farmers will push production We generally increase milk production when milk prices are low to make up for the lower prices and generally increase milk production when feed is less expensive and profitability has improved.

My recommendation is to initiate fence strategies for the first six months of 2014 by purchasing $16.50 put options and selling $18.00 call options. These can be done for anywhere from 20-45 cents. This provides a nice parameter while establishing a decent floor. I am concerned for milk prices next year.

Upcoming reports: (tentative dates subject to the government)

- Global Dairy Trade auction on October 15
- Livestock, Dairy, and Poultry report on October 18
- September Milk Production on October 21
- September Cold Storage report on October 22
- Federal Order Class I price on October 23
- September Livestock Slaughter October 24

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 may 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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