It has been over a year since the Class III milk futures contracts have traded virtually sideways for as long of a period as the current one month trend. This activity is reflecting the unwillingness of traders to buy into the market on the idea of stronger prices through the end of the year. Even with cheese prices increasing almost 25 cents per pound, futures prices still are not reacting.
The underlying concern is the domestic as well as global economic situation. With more banks going bankrupt and being bought out or bailed out, unemployment increasing, the housing market slowing dramatically, and personal debt skyrocketing; how long will dairy product prices remain at current levels?
Consumers are cutting back and will continue to cut back in many areas and dairy will not be immune to these cutbacks. Sure, people will continue to eat, but they will change their diets and change the products or amounts of the products they purchase. Some of the products already showing lower sales are products using dry whey. More recently is the use of nonfat dry milk. Both of these are ingredients in many health foods and snacks.
A recent news report indicated gas stations are feeling the pinch as consumers have been purchasing fuel and cutting back on other purchases in the convenience stores. This is getting worse. It appears that it will only be a matter of time before dairy demand will slow more than it already has. This may sound a bit harsh to those already struggling financially already due to high costs of production, but I do not want to sugar coat the reality we may be facing as dairy farmers in the months to come. I certainly hope the current economic situation turns around soon, but the reality is that problems keep cropping up daily.
Even with the reality of a $700 billion financial bailout looming in an attempt to stabilize the economy, it will likely be a short-term fix. Economic problem are much deeper and will take time to rectify. We need to be prepared for dairy prices lower than earlier predicted.
The September World Supply and Demand report for milk showed a reduction in the outlook for dairy price for both this year and next year. The average cheese price was reduced 1 1/2 cents to range from $1.9050-$1.9250 per pound while the average price for 2009 dropped1 1/2 cents to $1.8400-$1.9400 per pound. Butter price was decreased this year to range from $1.4050-$1.4450 while 2009 was lowered to $1.3500-$1.4800 per pound. Nonfat dry milk price is estimated to range from $1.3750-$1.3950 for 2008 and decreased 3 cents to range from $1.4550-$1.5250 per pound for 2009. The average dry whey price decreased 1 cent in 2008 to $0.2600-$0.2800 with the estimate in 2009 dropping 4 cents per pound to $0.2600-$0.2900. Thus, we can already see the pattern portraying lower prices due to expected slowing demand.
Despite the potential for lower milk prices than previously predicted, farmers continue to push milk production higher than the previous year. This is a natural reaction to tighter margins. Farmers will push as much milk production as they can to help pay the bills and keep cash flowing. The August milk production report showed a 1.1 percent increase in production over last year for the 50 states. However, cow numbers declined 4,000 head. This was due to the Cooperatives Working Together Herd Reduction program eliminating cows. It could very well have been an increase in cow numbers if it had not been for these cows going to slaughter. There were 226,000 milk cows slaughtered in August which was an increase of 17,000 head from the previous month and 14,000 head more than a year earlier. Nevertheless, production continues to increase.
Many producers are taking the wait-n-see attitude about marketing right now. However, this is not the time to fall asleep at the switch. A slowing economy increases the importance to protect price. The idea of $25-$30 milk seems to be just a dream. It looked possible while prices were high and demand was good, but the market does not indicate this now.
It is a real concern to see the cheese prices increase without Class III futures following. The trade is very skeptical and rightly so. September and October are historically our high priced months. Buyers have purchased product for the end of the year holiday demand replenishing their previously depleted supplies. This puts the market at risk of less demand and lower prices heading through the end of the year. Buyers do not have to be as aggressive in their purchases. Fill-in demand may be the only demand we may see through the end of the year. An increase in Class III futures of 50 cents per cwt. should be used as an opportunity to hedge more production. Those who have followed my previous recommendations should be 50% sold for 2009 with another price increase pushing hedged production to 75%.
Upcoming reports to watch for are the September federal order class prices on October 3; the August Dairy Products report on October 3; the World Supply and Demand report on October 10; Fluid milk sales on October 10; and the California Class I price on October 10.
--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 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.
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