Record high grain prices earlier this year as well as current high grain prices have had many analysts forecasting a tightening milk market. Some had expected milk price would reach upwards to $30.00 per cwt. before it was all said and done. However, this has not materialized and price has actually moved dramatically in the opposite direction.
For example, the nearby September Class III contract reached at high of $21.40 on May 21 and has fallen steadily to the current price at the time of this writing of $15.81. A price drop of this magnitude should have dairy producers pulling the plug and culling cows heavily. Marginal cows are generally eliminated from the herd rather than pay the high price for feeding them. An increased culling rate on USDA's Livestock Slaughter report would indicate farmers are feeling the crunch of high feed prices and are taking one of the steps in cutting costs. High priced feed should go to high producing cows to push production as much as possible.
The latest Livestock Slaughter report showed the highest dairy cattle slaughter for the month of July since 2003. There were 209,000 head slaughtered, 28,000 head more than the previous month and 29,000 head more than the previous year. It was the highest slaughter numbers since April. However, this is not as bullish as it would seem. What seems to be happening is that lower producing cows are being culling and replaced with better cows.
The Milk Production report for July showed an increase in cow numbers by 4,000 head. Even though slaughter increased significantly, producers still added more cows than were removed. This defies the idea that culling would increase, cow numbers would decline, and milk prices would gain. The August slaughter report should again see higher culling as the CWT Herd Reduction program should reflect quite a few of the cows accepted for removal under the program. However, this may have little, if any, impact as farmers continue to add cows and replace the lower producers with better cows.
The focus for market direction needs to be shifted to commercial disappearance. Demand for dairy products has slowed and supply is readily available. Buyers of cheese do not have to chase the market to purchase what they need. Sellers are willing to come to them. There has been a lot of cheese traded on the CME Group's cash market lately.
During the month of August, there have been 272 loads of both blocks and barrels traded representing about 10.9 million pounds. Buyers have been standing in and purchasing what has been coming. They are willing to purchase what they need at current prices rather than wait to see if it could weaken further. Time is of the essence and buyers want to get their hands on what they can now rather than wait until fall and holiday orders come through. If they waited, they may possibly have greater difficulty in obtain the desired quantities at a reasonable price. However, we need to bear in mind that the longer price remains at current level and buyers continue to purchase large quantities, the less aggressive they will need to be later in the year. This could minimize or eliminate a price increase through the end of the year.
Those who have not yet stepped up and hedged 50 percent of feed needs for next year per my last recommendation should do so. An early frost or yields not as good as anticipated could move grain prices higher quickly. The past two years had grain prices increase into harvest and then continued to increase into the planting intentions report in March. This year is shaping up to follow a similar pattern.
Upcoming reports to watch for are the August federal order class price on September 5; The July Dairy Products report on September 5; the California Class I price on September 10; The World Agricultural Supply and Demand report on September 12; and Fluid Milk sales on September 12.
-- 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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