Grain prices could be near a top

July 6, 2008 07:00 PM
 
Robin Schmahl

The cost of feeding cows continues to escalate with grain prices not showing any indication of changing this trend.

In fact, recently the news of a hot, dry period for July caused more buying in grains. Previously, many in the Midwest wanted a hotter, dryer period to straighten things out and improve crop conditions. As one commentator put it last week - ‘a rain event or a hot, dry period would both be detrimental to the crop.' This does not leave much that would be ideal for crop development.

One thing we do need to keep in mind is that farmers are resourceful, and they can get the job done. There has been some late planting or replanting of corn and soybeans due to high grain prices making it attractive to plant late and hope for the best.

It was a bit of a surprise to see 87.3 million acres of corn and 74.5 million acres of soybeans planted this year according to USDA on the Planted Acreage report. This was an additional 1.2 million acres of corn than was intended in March and 290,000 less acres of soybeans. Of course, some of this may change by the time harvest is complete as crops have a long way to go before harvest.

There was an initial reaction to the acreage report, but the market adjusted and for the most part remained strong in corn and continued to make new contract highs in soybeans. One thing to be aware of with these markets is to realize that they will not turn on fundamental news, but rather the change in trader perception.

We experienced this during the spring of 2004 in soybeans. The market was very bullish with prices moving almost straight up on the perception that we were going to run out of soybeans. Some feed suppliers were not offering forward contracts on soybean meal, citing that they were not sure if they would be able to fulfill contracts due to short supply. In May of that year, the perception of the traders changed. They realized they would not run out of soybeans, but only have tight ending stocks. The market put in a top and declined most of the growing season.

The current market is facing some of the same scenarios. The market is very bullish, there is concern we could run out of supply, and the crop is behind normal in development. When the market is the most bullish, sometimes the top is in. This should be watched closely as a price retracement will be the opportunity that will need to hedge feed prices for next year. This is becoming increasingly important in light of the fact that milk price has been declining with cheese supplies more plentiful.

Hay supplies and prices are another concern for many farmers.  Hay acres are dwindling as grain prices escalate. The USDA Planted Acreage report indicates 60.4 million acres of hay are planted. This is 1.2 million acres less than last year. Alfalfa acres are 900,000 lower with other hay acres 300,000 lower. Weather has not been conducive for good quality hay harvesting in many areas due to rain, while in others, volume was less because of drought. Lower acres and quality issues are the main reasons hay prices have risen significantly. The price of alfalfa hay is $172.00 per ton according to the June Agricultural Prices report. This is an increase of $35.00 per ton over a year ago. The all-hay price is $30.00 per ton higher at $161.00 per ton. It does not look like this is going to get better any time soon.

Despite escalating grain and hay prices, dairy farmers are still getting more milk from the herd. Cows continue to be added with milk output increasing. The higher grain and hay prices have not yet had the anticipated impact on milk production. Cull cow numbers have not increased significantly as many are being fed with previously contracted grain. This will change at harvest time with many contracts running out and farmers needing to purchase grain at the market price. That is unless grain prices retrace significantly. There has been some talk the ethanol and bio-fuels mandate may be reduced due to increasing food and feed prices. The World Bank released a report last week indicating global food prices have risen 75 percent rather than the 3 percent previously indicated. There is a G8 meeting soon addressing the world food crisis.

Even though markets can be very bullish, they can have significant setbacks as seen in Class III milk futures. The July Class III futures contract is a prime example with price declining $3.11 since May 23. Projections had been made for cheese prices to reach $2.50 or even $3.00 per pound sometime this year. This may still happen, but it would curtail demand significantly. International demand and domestic demand declined when cheese reached $2.28 and has not yet returned to previous levels even though price has fallen to the $1.90 area.

The hedging recommendation for 2009 is to establish a fence position by buying an $18.00 put option and selling a $23.00 call option for 30-40 cents. This establishes a nice parameter with a good floor while leaving the upside open to $22.60 (the call strike price minus the price paid for the spread).

Upcoming reports to watch for are the California Class I price on July 10; the World Agricultural Supply and Demand report on July 11; the June Monthly Milk Production report on July 18; the federal order Class I price on July 18; and the June Monthly Cold Storage report on July 22.


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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