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Economy affects commodities

00:00AM Oct 13, 2008
Robin Schmahl

The focus of the commodity markets has shifted almost exclusively on the equity markets. Failing banks and lending institutions that have been purchased by another bank or bailed out by the federal government pushed the stock market below 9000 points. This is a stock market level not seen since 2003. (The stocks market actually fell below 8000 for a brief period during late 2002 and early 2003.)

So, will stocks gain value as quickly as they did last time? This is unlikely. The difference now is that most of the world economies are being affected, not just the U.S.

 Why is the failing economy affecting commodities so much? Prices have been falling in grains, livestock, energies, etc. Weather has had an impact on the weakening prices due to extended nice weather without frost, allowing for late planted crops to mature.

The USDA increased their estimate for grain production on the October Crop Production report and World Supply and Demand report. Corn production has now been increased to 12.2 billion bushels and soybeans have been increased to 2.982 billion bushels. This increases the expected ending stocks to 1.154 billion bushels for corn and 220 million bushels for soybeans. Actually, this is not very much carryover for the end of the year, but the market feels a bit more comfortable than they did earlier. However, the declining prices in commodities have been driven lower in a large part by speculative money being pulled out of the markets. A huge amount of outside investment money has been flowing into the commodity market for a number of years as commodities were viewed as a good investment to diversify portfolios. The falling equity markets have been causing investors to pull their money out of commodities resulting in falling commodity prices across the board.

Dairy prices have been interesting through all of this. Cheese and butter prices have been almost immune to much of what is taking place in outside markets. Block and barrel cheese prices remain relatively strong with prices hovering in the $1.80's. Butter has been holding in the $1.60-$1.70 range. These prices are higher than they were two months ago.

The real impact in dairy has been in the dry whey and nonfat dry milk market. The weekly NASS dry whey price is $0.2021 per pound and nonfat dry milk at $1.0646 per pound. A year ago, the NASS dry whey price was $0.4126 per pound and the nonfat dry milk price was $2.0556 per pound. This has resulted in significantly lower prices on the milk check.

Both whey and nonfat have been affected dramatically by demand. In fact, nonfat dry milk was purchased by the CCC last week under the price support program for the first time since July 17, 2006. Cheese and butter are benefiting from the time of year, with expected holiday demand holding prices higher. Buyers are purchasing for expected orders and to maintain a supply cushion for unexpected demand. However, futures traders are less optimistic and are keeping a discount in Class III milk futures.

The slowing economy and the effect on commercial disappearance is a real cause for concern. Milk prices have already fallen significantly from earlier this year with futures prices anticipating a further decline into the end of the year. What hurts the most is that 2009 Class III futures reached an average high of $20.59 just four months ago. The current 2009 Class III average is $15.95.

The USDA lowered their 2009 estimate for cheese price by 7 cents on the U.S. Milk supply and Use report, to a range of $1.78-$1.87 per pound. The nonfat dry milk price was adjusted 38.5 cents lower to $1.07-$1.14 per pound, and dry whey was decreased 5.5 cents to $0.2050-$0.2350 per pound. Butter was increased 4 cents to an estimated price range of $1.39-$1.51 per pound. This results in a decrease in the Class III forecast average of $1.00 to the current range of $15.58-$16.75. Class IV declined $3.15 to range from $12.95-$13.95 with a resulting decrease in the all-milk price of $1.45 to the range of $16.50-$17.40 per cwt.

Those who have been following my recommendations should have 50 percent of 2009 milk production hedged at $19.00 or higher. I am currently recommending fence positions in 2009 by purchasing put options near the current trading price and selling call options $2.00 higher to pay for part of the cost of the put. This establishes a $2.00 parameter and allows you to take a higher price upwards to the call option that is sold. I am also recommending purchasing call options on expected feed needs for next year. The funds liquidating positions in the grain markets are giving the opportunity to protect feed prices.

Upcoming reports to watch for are the September Milk Production report on October 17; the September Cold Storage report on October 22; and the September Livestock Slaughter report on 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 Web site at

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.

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