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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.

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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COMMENTS (1 Comments)

CARROLL - JASPER, NY
Cut production until the market pays what the product should be valued at . We need to cover our "cost of production , plus a profit " .
6:12 AM Mar 5th
 

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