Procrastination May Cost Us Dearly

October 5, 2010 07:30 AM
 

First China, then Russia said “no” to U.S. dairy imports. We need to call on USDA and other officials to take care of what needs to be taken care of -- or our export markets may be limited.

 
By Robin Schmahl, AgDairy LLC
 
Well, here we go again. Last week, Russia announced a ban on dairy products from all countries -- the U.S. being one of them -- that have not met its demand to establish a list of plants meeting Russian requirements. This was not announced on a whim but has been an ongoing issue with Russia for nearly two years. The U.S. has not had a bilateral export certificate during this time, and now Russia is enforcing it.
 
This may not have much impact on exports as a whole. January-July exports to Russia only totaled 3.4 million pounds of butterfat and 2.4 million pounds of nonfat dry milk. Russian imports of dairy products from the U.S. have been very erratic over the years. In 2008, it imported 33.9 million pounds of butterfat while in 2009 it imported 1.9 million pounds.
 
So, even though Russia will not import dairy products from the U.S. and other countries that have not met its requirements, it will still import dairy products and get them from countries that have met its requirements. The most likely country will be the European Union. As demand increases for European dairy products, Europe will, in turn, import to satisfy domestic or export demand, with the U.S. being the country the EU will most likely turn to. It is possible the same amount of business will be done, only in a round-about way.
 
Why should we not be complacent about this? Business is business, and any loss of market share is a loss to our dairy industry. A little here and a little there can eventually add up to be a significant amount. The U.S. is competing in a global market, and it is a different playing field. In order to be competitive, we need to adapt to that playing field or we will eventually lose. We need to call on USDA and other officials to take care of what needs to be taken care of or our exports markets may be limited. We certainly do not want to see more money being taken out of farmers’ pockets for the purpose of subsidizing exports to move our products.
 
This sounds familiar. On June 1, a deadline was reached requiring certain verbiage and requirements needed to be implemented to obtain health certificates for exporting dairy products to China. As a result, China was going to ban the importation of dairy products for the U.S. However, this has been put on the back burner. China had not enforced the deadline giving USDA and the Chinese more time to work this out.
 
However, despite some international issues and large domestic cheese supply, milk prices remain well-supported. September class prices were announced last week, showing another nice increase. The Class II price was $17.60, an increase of 62 cents from August; Class III was $16.26, up $1.08; and Class IV was $16.76, up $1.15. These are the highest prices since the third quarter of 2008.
 
Cash prices on the daily spot market at the CME Group remain steady to higher. The market is balanced with buyers purchasing what little is being offered at current price levels. Higher prices have not yet turned consumers away, resulting in some backing up of product. This may eventually happen once end of the year and holiday demand is satisfied, but for now we can enjoy higher prices.
 
Class III milk futures are not so optimistic, maintaining a significant discount to the underlying cash in 2011 contracts. Increasing milk production and improving components will increase dairy product availability unless demand will rise to offset the increase. Seasonally, demand will slow early in the year, and futures contracts are anticipating this.
 
Feed price protection is the emphasis now. The quarterly stocks report released Sept. 30 was bearish for corn and neutral for soybeans. As a result, corn’s price has fallen to levels that demand action. December corn falling due to huge fund liquidation is providing the opportunity to establish feed price protection.
 
Purchase call options in December no more than two strike prices from the current futures price. Purchase call spreads for subsequent months for a net cost of 20 cents for contracts through July. Do the same for soybean meal with December futures price below $290 per ton.
 
Upcoming reports:
 
-          Fonterra auction on Oct. 5
-          World Agricultural Supply and Demand report on Oct. 8
-          California Class I price on Oct. 8
-          September milk production report on Oct. 19
-          Fonterra auction on Oct. 19
 
 
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 its website 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 my not be suitable for everyone. Those acting on this information are responsible for their own actions.

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