Higher Milk Pricecs to Come

Published on: 15:27PM Aug 17, 2009

By RobinSchmahl

It took the action of temporarily increasing the support price for blocks, barrels, and nonfat dry milk powder by the USDA to increase milk prices. Of course, these increases have yet to be realized in our milk checks, but they are coming.

The August milk price can claim limited benefit of the reaction to higher support prices. By the time this was implemented, two weeks of the August contract had already been priced by the trade. Lest you are confused by this statement, you need to realize that pricing is virtually done in a two-week delay.

To clarify this, I will use an example. One week of trading in the CME spot market determines an average price for the week, and that pre-determined price is used for cash business the following week. At the end of the second week, the average cash prices of cheese, butter, dry whey, and nonfat dry milk in the country will be used to determine the weekly NASS prices. Traders use four weeks of the spot price averages for cheese and butter to determine the estimate of the announced federal order class prices. Thus, the trade uses the average cash prices from the middle June through the middle of July to determine where the July class prices might be. This is the reason most contracts will basically trade sideways or flat-line with limited price movement for the final two weeks of the contract. Many times this sideways trade will begin earlier than the final two weeks. If you look at Class III futures charts during the final month of the contract, this will be plainly seen.

Higher milk prices are finally becoming a reality. The August Class III futures contract is trading around $11.15 and if realized will be $1.18 higher than July and the first time this year the base price will be above $11.00. This certainly is a victory and one that has been too long in coming. However, it still remains far short of profitability.

The increase in cheese prices since the raising of support prices will definitely have an impact on the September milk check. This month will begin to be priced this week. September futures are currently at $12.47 price at the time of this writing which will add nearly $1.50 to what will be received in August. With schools opening soon, cows being eliminated under the CWT herd reduction program, and buying being done in advance of holiday orders, the worst is likely behind us. The only thing that may hold back upside price potential is the high inventory levels. These will need to be reduced before supply will be tightened significantly allowing milk prices to move back above the cost of production.  

Feed prices need to be watched closely. You do not want the milk price to move higher only to find out that feed prices have been moving higher, erasing much of the gain. The USDA indicated on their latest World Supply and Demand report that there should be sufficient corn and soybeans available to meet demand. Even after they resurveyed corn acres in eight states for this report they left the planted acreage unchanged at 87 million with a production of 12.7 billion bushels. Soybean acres were raised to 77.7 million acres with a production of 3.199 billion bushels. Prices have fallen back significantly since the report, providing the opportunity to hedge feed needs for the coming year.

My recommendation for feed is to purchase call options or call option spreads if the market finishes the liquidation that it currently may be in. Purchase a near-the-money corn option and sell a call option 70 cents above for a total cost of 20 cents. Do this for corn needs through the first half of next year. Soybean meal is a little more difficult to do the spreads. I recommend purchasing futures positions for meal needs for all of next year. If you can do a forward contract with your supplies this is also recommended or do a combination of a forward contract and futures or options. Watch the market closely as a bottom needs to be confirmed first before these strategies are implemented.

Upcoming reports to watch for are the July Milk Production report on August 18, the September advanced Class I price on August 21, the July Livestock Slaughter report on July 21, the July Cold Storage report on July 21, and the Agricultural Prices report on August 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.

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