The month of March has changed the direction of the dairy futures market. Futures contracts have increased upwards of $2 per cwt since the first of the month in some of the 2009 contracts. The twelve-month average for 2010 increased 88 cents during the month of March.
Overall, the attitude seems to have changed from bearish to bullish. The gloom and doom of the beginning of the year has quickly given way to a more positive price outlook, at least according to the Class III futures. Along with increasing futures prices comes the thinking by some dairy farmers to purchase replacement heifers at the current lower prices. The idea is to fill up the barn and increase milk output by the end of the year and take advantage of the forecast higher prices.
Cash cheese prices are about 12 cents higher than they were at the beginning of March, but are not yet higher than the price it was near the end of February. That may change in the near future unless the pattern of the past two price rallies holds. Once cheese prices reached or exceeded $1.30 buyers become less aggressive and stepped back allowing cheese prices to decrease. The market seems to be content with price fluctuating from $1.20-$1.33. Despite the available supply of cheese and slower demand, buyers have been interested in purchasing cheese.
Since the beginning of the year, there have been 378 loads of blocks and 147 loads of barrels traded on the CME Group's cash market. This equates to approximately 15.9 million pounds of block cheese and 6.2 million pounds of barrel cheese. It is apparent that some of this cheese is being purchased and put into storage for later in the year. After all, it makes sense to purchase cheese at these prices to guard against a possible increase if milk supply tightens.
Commercial disappearance of dairy products during the period of November through January showed a reduction of 1.1% from a year earlier. Fluid milk product disappearance was 0.7% higher. Commercial disappearance of American cheese during this three-month period showed an increase of 2.1% while other cheese decreased 4.0%. Butter disappearance decreased 0.6% while nonfat dry milk increased 6.1%. This is the first rolling three-month compilation that showed negative commercial disappearance of dairy products for quite some time. This is not surprising as demand remained strong until late in 2008.
It is likely commercial disappearance will be negative until the economy begins to strengthen and more people go back to work. With most other areas of the economy suffering from reduced buyer demand, we cannot think that demand for dairy is going to increase. Granted, people will need to eat, but eating habits and varieties of food change when finances are tight. However, the effects from higher culling rates and reduced milk production will have the impact on dairy prices due a tightening milk supply.
My recommendation is to take advantage of the higher Class III futures prices by initiating fence strategies. This consists of purchasing put options and selling call options. A fence will establish a floor and a ceiling. These should be established for the last half of this year. I am recommending a July price spread between the put and call of $1.25, but can then be increased until the price spread increases up to $2.00. This establishes nice downside price protection while allowing you to take advantage of some upward price potential.
Upcoming reports to watch for are the Planting Intentions and Quarterly Grain Stocks reports on March 31; the California 4a and 4b prices on April 1; the March federal order class prices on April 3; the Dairy Products report on April 3; and the World Agricultural Supply and Demand report on April 9.
--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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