Marketing demands common sense

November 9, 2008 06:00 PM
 
Robin Schmahl

The decline of Class III futures prices has taken place in tandem with most other commodities. The economic impact had a huge impact on the imploding commodity prices.

Historically, markets will always fall faster than they increase, but the latest bullish run in the markets was thought to be an exception. There were many days of limit higher moves in the grain and energy markets, with dairy futures posting similar moves. The idea was that higher input prices and rising costs of production was sure to keep milk prices increasing. Thoughts of $25 and $30 per cwt. milk was running rampant as the onslaught of moisture this spring and early summer in the Midwest and other areas drove grain prices higher.

World demand for energy fueled the fire along with billions of investor dollars flowing into the commodity markets as investors wanted to diversify their portfolios to take advantage of the exploding commodity sector. However, the old saying that high prices will cure high prices is always true.

The job of the market is to find a level where demand will slow, and once that level is reached price will change direction as the market works to maintain a supply/demand balance. What generally happens is that the market will over correct to one side or the other as the sentiment changes and traders trade with the trend. Grain, milk, and energy prices (along with other markets) have fallen dramatically over the past 4 1/2 months, erasing what the markets gained over the previous 18 to 20 months.

Common sense always needs to be exercised in these markets despite the euphoria of the moment. There are always those analysts that get on board with the market direction and will project where prices will peak or bottom, many times causing farmers to miss out on great hedging opportunities as they wait for those price projections to be reached.

The important thing is to look at your operation and decide what prices will meet your objectives for cash flow and your goals for the operation. Common sense suggested corn prices could not remain above $8, soybean prices above $16, and wheat above $16for very long. Common sense suggested that milk prices could not go to $25 or $30 very long as demand would be affected. This pattern was seen in the dry whey and nonfat dry milk market. These markets were thought to remain high for an extended period of time, but high price weaved its magic and shut off demand. These markets are still reeling from the effects of being overpriced which resulted in demand moving away to alternatives or just less usage.

A major difficulty milk producers faced in making hedging decisions for 2009 was that many feed suppliers were not offering forward contracts. So with the circulating idea that milk prices were going to continue to increase, very few were willing to commit to a milk price that could end up being below cost of production if feed prices continued to increase. However, with dairy prices and demand being tied closely with the economy, steps needed to be taken when bearish economic news began coming out daily.

This downturn in the economy is not yet over and will likely become worse before it gets better. So, we need to take a lesson from what has transpired over the past two years and look now at hedging feed costs for next year.

Grain prices have fallen dramatically allowing for feed prices to be hedged at a better price than expected. Even though the economy may slow further, demand for grain continues to remain fairly strong both domestically and internationally. Traders will begin looking forward to next year's crop and prices generally move to become attractive for farmers to plant one crop over another or a balance of them. Prices will move higher in order to purchase acres and make sure enough of each crop is planted. A price that is too low for corn will result in more soybean acres, while an increase in the soybean price will naturally increase corn prices to keep enough acres planted.

Do not let the present opportunity pass by. There is generally at least one good opportunity to hedge feed prices during the course of a year and this may likely be it. My recommendation is to hedge all soybean meal and corn needs for next year.

Upcoming reports to watch for are the Livestock, Dairy, and Poultry report on November 17; the October Monthly Milk Production report on November 17; the October Monthly Cold Storage report on November 21; the October Livestock Slaughter report on November 24.

--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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