Dairy Market Showing Signs of Improvement

April 20, 2010 07:00 PM
 

By Robin Schmahl
 
A recent move to the upside in cheese prices ran into a ceiling less than two weeks ago.

Buyers were unwilling to bid blocks higher than $1.51 or barrels higher than $1.45 1/2. Sellers held out as long as they could while waiting for prices to increase. Once sellers began to re-enter the market with more aggressiveness, buyers stepped back. Some cheese being held back from the market began to move toward the 30-day-old mark, after which it cannot be traded on the spot market unless it is specified as aged.
 
This wasn't the only reason cheese prices began to fall. Orders began to fall off with some cancellations due to cheese prices increasing so quickly. Demand began to be affected. This demand was not necessarily from the consumer reducing purchases but more from the buyer standpoint.
 
Inventories have been increasing seasonally and remain at the highest level they have been since the mid 1980s. Buyers have been looking ahead and purchasing cheese fairly consistently during the past four months. They are building a product cushion to avoid being caught short during the higher demand period later this year.
 
So, when prices increase too much, they step back. They have extra product already on hand and will wait until prices weaken again. I know this appears to be market manipulation, but the fact of the matter is, this is business. Any of us would do the same.
 
In fact, many farmers do this with feed purchases. Feed will be purchased hand-to-mouth until prices drop enough to forward purchase for future months or for the year. This eliminates the need to purchase feed when prices increase and become more volatile. If you are a seller of grain or hay, you wait until price increases before you let go of some of your inventory.
 
There are some signs the dairy market is improving. A bottom has likely been established and milk prices should not fall lower than they already have. I know this is not much consolation right now especially since cheese prices and Class III milk prices have fallen below $13.00 again.
 
Probably one of the most-watched monthly events is the Fonterra Auction. This auction is held on the first Tuesday of each month trading Whole Milk Powder, Skim Milk Powder, and Anhydrous Milk Fat.
 
It gives an idea of world demand and world prices. In fact, other than daily spot trading, it is the only event that takes place which gives us the information almost immediately. All other reports in the dairy industry are generally one or two months behind, which is why it has become one of the most watched reports/events of the industry. The latest trading event resulted in the Whole Milk Powder price increasing 21% and the highest level it has been since August 2008, Skim Milk Powder price increased 25.5%, and Anhydrous Milk Fat price increased 21.9%.
 
This certainly indicates improved global demand and, although it does not directly impact what takes place on the daily CME spot market, better demand and higher world prices will impact domestic prices.
 
Another sign of improving demand is that of our exports. The latest report from the Foreign Agricultural Service indicates exports during the month of February improved over the same month a year ago. Exports of whey improved 29.4%, nonfat dry milk exports increased 21.9%, cheese and curd increased 16.6% with butter and milkfat exports up 19.3%. The level of exports remains lower than 2008, but this is certainly showing some light at the end of the tunnel.
 
Lest you think I am saying milk prices will be improving significantly soon, this may not be the case. There is still a large quantity of cheese in inventory which needs to be reduced. Inventory continues to increase monthly and will likely increase seasonally through June. There are nearly a billion pounds of cheese in inventory, a level last seen in 1984. This needs to be reduced and supply needs to tighten. This may not happen quickly with milk production steady and increasing over last year.
 
I have been promoting purchasing put options and fence positions for some time now as a strategy for price protection. Those who have implemented these positions have been rewarded with protecting a higher price for their milk.
 
I continue to recommend these positions each time futures move up significantly. Put options work well for closer months due to less time values, while fence positions work well for later months by utilizing time value to your benefit. Try to maintain at least a $1.50-$2.00 price spread between the put and call when using the fence.  
 
Upcoming reports to watch:
 
- Livestock, Dairy, and Poultry Outlook report on April 21
- March Cold Storage Report on April 22
- May Class I price announcement on April 23
- March Livestock Slaughter report on April 23
- Commercial Disappearance on April 27
- April class prices announced on April 30
- April Agricultural Prices report on April 30
 
 
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

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