How optimistic can we be with prices?

March 15, 2009 07:00 PM
 

Robin Schmahl

The USDA released a slightly more positive outlook for dairy prices last week on their World Supply and Demand report.

The cheese price this year is estimated to range from $1.2150-$1.2750 per pound, an increase of 3 cents from February's estimate. Butter price was raised by an average of 2 cents per pound to the current estimate of $1.1050-$1.1950 per pound. They estimate the Class III price will average from $10.05-$10.65, an increase of 35 cents on the lower end and 25 cents on the upper end of the range. Class IV is estimated to range from $9.50-$10.20 and the all-milk price is estimated to range from $11.25-$11.85 per cwt. While these prices are not great, they are an improvement from their previous estimates.

Estimates for very optimistic milk prices are circulating, particularly for the second half of the year. At the present time, these need to be viewed as wishful thinking. The current futures prices are somewhat optimistic already given the current economic situation and present demand. End of the year futures are suggesting cheese price will exceed $1.60. This is a tall order unless world prices increase along with domestic prices. Culling rates are increasing, not only in the U.S., as low dairy prices around the world are having an impact. The fact that the EU is subsidizing exports will keep it difficult for other countries to compete in the export market.

There is plenty of support from dairy groups to eliminate a large amount of milk and create tightness in the market. This would force prices higher and thereby allow farmers to become profitable again. Although we all hope for higher prices so dairy farmers can remain in business and build equity. Forcing prices higher without the support of the economy and world prices will be short-lived. History has shown time and time again that when domestic prices increase significantly over world prices, the rate of imports increased substantially. Dairy prices are no different than other commodities. When domestic grain prices become too high, export interest decreases. When fuel prices decline, ethanol demand decreases. We are not an island of ourselves anymore. We have become a global economy and that has changed things dramatically. I think we would all rather see prices increase for the long-term and not only for a short duration.

The bottom line is that the current recession (depression) is world-wide and this needs to be taken into consideration when anticipating milk prices this year. This certainly is not an easy task and not one that can be predicted just by estimating how much milk needs to be eliminated from the market in order to improve prices by a certain dollar value. I do hope that prices will improve to keep farmers from being forced out of business. However, since the beginning of the year, the stock market has done nothing, but decrease with only a few minor retracements higher. This does not bode well for the economy in the near-term. Federal Reserve Chairman Bernanke, has now pushed back his recovery timing to sometime in 2010.

So what can be done in the mean time? My recommendation is to make sure your feed needs are hedged to guard against an increase in prices. Then look to the Class III futures market to see what can be done to cash flow in some months. I recommend doing a fence position on a portion of your milk for the last half of the year. This consists of purchasing a put option near the current futures price and selling an out-of-the-money call option to help pay for the put and increase your floor. This can provide an opportunity to establish a $1-$2 higher ceiling if the market price were to strengthen. This would allow you to take a higher price than just stepping in a selling a futures contract at current prices.

Upcoming reports to watch for are the February Milk Production report on March 18; the April Advanced Class I price on March 20; the February Cold Storage report on March 20; the February Livestock Slaughter report on March 20; the March Agricultural Prices report on March 30; and the Prospective Plantings report on March 31.

--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.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

 

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