A Good 2008, But a Rough 2009

Published on: 09:24AM Jan 08, 2009

All commodity markets realized unprecedented movement in 2008. Optimism in the early part of the year turned quickly mid-year in reaction to the World economic situation.

The failure of banks and major investment firms caused many investors to panic and pull their money out of the markets. Scandals were uncovered, increasing the desire to pull money out of investments. This increased panic spilled over into all commodities as those with diversified their portfolios needed to trim their exposure. In addition to this, crops eventually were planted and milk production did not decline as expected. Consumers have now moved into survival mode and have changed buying habits significantly.

What has this changed market to dairy prices? It has resulted in prices at multiple year lows.

Cheese and butter prices seemed to be immune the weakness taking place in the other markets. Buyers remained willing to purchase cheese at a higher price through the early part of December. The time of year buoyed the market prolonging the inevitable decline in prices. However, price finally succumbed to the slowing economy and cheese prices fell near support by the close of the year. The average Class III futures price for 2009 has made an unprecedented decline falling $8.03 per cwt. during the last half of 2008. The 2009 February Class III contract is the lowest with the price closing the year at $10.28. If this price is realized for February it will be the lowest announced price since June 2003. In fact, current prices would equate to a Class III price near $9.40 if the cheese, butter, nonfat dry milk, and dry whey price remain at the present levels for the next month.

The butter price has fallen to the lowest level it has been since July 2003, adding pressure to the milk price. Nonfat dry milk and dry whey prices were the leaders with prices falling from record high levels in 2007 to multiple year lows and in the case of nonfat dry milk, product moved to the CCC on almost a daily basis since early October. A total of 114.6 million pounds were purchased by the CCC during the final three months of 2008.

World dairy prices have fallen significantly over the past year indicating that dairy prices may not recover very quickly unless world prices begin to recover. World demand will need to turn around and increase before prices will turn higher. Unfortunately, World dairy prices are anticipated to remain depressed for most of 2009. Along with these lower prices, U.S dairy exports are expected to decline as much as 35 percent during the year. 

Dairy producers have not yet felt the full impact of the falling prices. The December Class II price was announced at$11.21; Class III was $15.28; and Class IV was $10.35. Lower prices will be felt earlier by those who have a higher utilization of Class II and Class IV milk. Others will not feel the real brunt of it until the January milk checks come during February. The average Class III price for 2008 was still a respectable $17.44 per cwt.; a decrease of only 60 cents from the 2007 average.

So, what is there to do now? My earlier recommendation was to hedge feed prices for next year and that recommendation continues to be relevant. In fact, corn price has already increased $1.00 per bushel in the past month. Soybeans have increased $1.90 per bushel with soybean meal increasing $60.00 per ton. The potential for higher prices is very real and you do not want to watch feed prices escalate again at a time when milk prices will be well below cost of production. This will compound the problem.

Upcoming reports to watch for are the January World Supply and Demand report and Crop Production report on January 12 and the December Milk Production report on January 16.

--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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