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March 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.

Do Dairy Imports Significantly Affect Prices?

Mar 18, 2013

They’re not trivial, but there are more important factors, including U.S. exports and the loss of the monthly milk production report.

Milk production remains strong with the first signs of spring flush being seen at the processing level. Spring flush is not expected to be as strong as usual due to continued heavy culling.

However, production is expected to be slightly higher than last year. In the future, this will be very difficult to measure as the monthly Milk Production report will no longer be available. Actually, two key reports in the dairy industry are being discontinued after the February report is released as part of the budget cuts. The monthly Milk Production reports and the bid-annual cattle inventory reports.

This has created quite a bit of discussion in the dairy industry and rightly so. The industry will no longer be able to measure the trend of milk production and there will be no way to determine the amount of increasing or decreasing milk production, or no way of knowing the increase or decrease of cow numbers. We will not know the percentage gains or losses in individual states. In essence, the industry will be blind with only regional and manufacturer reports providing some indication as to the level of milk production. It will be very difficult for the industry to adjust to this.

USDA projects the nation’s dairy herd to average 9,195,000 head this year, slightly lower than last year. Output per cow is projected to increase to 21,960 pounds. These projections are a bit surprising as they do not seem to reflect the effects of a continued low milk/feed ratio and continued heavy culling. We are seeing another round of heavy culling as more farmers are being forced out of business while others see their feed supply dwindling.

There have been some questions as to how much impact imports are having on our milk prices. Questions generally always come up when profit margins are tight and milk prices are lower than desired. It is obvious imports do have an impact, but the impact is not as great as perceived. Cheese imports in 2012 totaled 340.0 million pounds. Net cheese imports recently exceeded exports for the first time since the end of 2009. However, some months are higher than others.

Although imports of 340.0 million pounds are substantial, it only amounts to 3%-4% of total milk production in the nation. There will always be some products that are imported due to insufficient quantities of it in our country or for various other reasons. The greater reason imports may increase is due to the strength of the U.S Dollar. Importers will bring in more product if domestic prices are high or the exchange rate of the dollar makes it attractive. On a milk solids basis, imports amount to 3.2% of total milk solids produced. Exports of dairy products were 13.2% of total milk production on a milk solids basis.

Total volume of dairy products exported in 2012 reached over just over 4.0 billion pounds. Of that amount, cheese and curd exports totaled 573.3 million pounds, up 15.8% from 2011. The total value of U.S. dairy exports in 2012 reached $5.21 billion, 8.0% above 2011 and a new record. The value of lactose products jumped 50% with an increase of $192.3 million, yogurts increased 28.7%, and whey and whey products rose 11.5%. Cheese and curd export value increased $152.2 million, up 15.9%. Ice cream and frozen desserts jumped 39.6%.

So, despite the idea that milk prices could be higher if there were no imports, this will never be a reality. There are many factors involved in dairy prices. We are competing on a global scale and prices will rise and fall accordingly.

Upcoming reports:

- The Global Dairy Trade auction in March 19
- The February milk production report on March 19
- Advanced Federal Order Class I price on March 20
- February Livestock slaughter report on March 21
- February Cold Storage report on March 22
- The Agricultural Prices report on march 27

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 publication.

 

Better Prices Require Better Demand

Mar 01, 2013

What’s needed for supply to tighten enough to push dairy prices higher?

It has been surprising to see the ingenuity of the dairy producer over the past six to eight months. There have been significant adversities indicating milk production was to decline significantly. Record low milk-to-feed ratios showing virtually non-existent profitability have not deterred dairy producers from pushing milk production. The most recent "Agricultural Prices" report had a February milk-to-feed ratio at 1.54, slightly lower than a year ago.

Heavy culling took place last year as feed prices soared. Milk prices followed, but did not have the strength to distance itself from a tight relationship with feed prices. In essence, the market virtually traded dollars for dollars. However, rather than a continuing decline in milk production, the opposite was true. Milk production continued to outpace the previous year. Replacement heifers were waiting in the wings to replace those cows that were culled. There were farm foreclosures, but that did not seem to have the anticipated impact on the market.

So, one has to wonder what will need to take place for supply to tighten enough to push prices higher? There is no clear answer for that. Heavy culling and high feed prices have not been able to do the job.

Some have been beating the drum over imports and the effect they are having on keeping prices lower. This, however, does not really seem to be an issue in the big picture. There are months when greater volumes of cheese and other products are imported, which could result in a greater impact during those times. Business is going to be done, and various amounts of cheese and other products are going to be imported.

Special varieties that are not produced in the U.S. will continue to be imported – although those varieties are declining as more are being manufactured within the states. Some of it has to do with the value of the U.S. dollar relative to other currencies. Imports of quota cheese in January totaled 9.9 million pounds, down 10.6% from a year ago. Imports of High Tier cheese (above quota and with a penalty) totaled 1.8 million pounds, down 22.4% from a year ago. This seems to indicate limited impact on prices.

Improving consumer demand appears to be the best hope for stronger milk and dairy product prices -- not just for cheese but for all categories of dairy products. Trends show strong per capita consumption of cheese, with growth nearly every year. However, consumption of fluid milk and cream continues to decline. Since 1975, fluid milk and cream consumption has declined 23.0%.

Over the same period of time, per capita cheese consumption increased 134.8%. Cheese consumption increased 21 of the past 23 years, reaching 33.7 lb. per person in 2011 (2012 figures are not yet available). Consumption of all dairy products increased 65 lb. per person since 1975, reaching 604 pounds. Yogurt consumption has increased the most on a per capita basis, increasing by 11.7 lb., reaching to a total of 13.7 lb., up 585.0%!

Here is where the real support for dairy prices lies. Improving fluid milk and cream consumption seems to be elusive, but other product consumption is gaining the favor of consumers, not only in the U.S., but worldwide. This is the market we need to cater to and capitalize on.

My current recommendation is to do a three-way spread in Class III milk futures. Purchase at-the-money put options; sell put options $1.25 below the market, and sell call options $1.25-$1.50 above the market for 25 cents. This will allow the ability to take some of the upside if the market would strengthen. There will only be downside price protection to the sold put option. In the current market environment, this strategy has been working well, with the purchased put gaining value while the sold put and sold call expire worthless. Even if the market would fall apart, this strategy with protect some your downside risk, which is better than doing nothing.

Upcoming reports:

- Dairy Products report on March 4
- Global Dairy Trade auction on March 5
- Dairy exports on March 7
- World Agricultural Supply and Demand report on March 8
- Livestock, Dairy, and Poultry outlook on March 14

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 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 publication.
 

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