Higher Milk Prices Expected in 2010

Published on: 18:06PM Jan 04, 2010

By Robin Schmahl

A new year is before us, and hopes are high that it will be better than 2009. Working hard to produce good quality milk demanded by the consumer, only to end up with less money than when we started, is a difficult way to make a living.

This is not the fault of the consumer and it is not the fault of the industry but the result of a slowed world economic situation resulting in lower demand. I know there has been a lot of finger-pointing going on to try to place the blame. There have also been a lot of ideas of how to fix milk prices. We can be confident in saying that improved export demand and improved domestic consumer demand will go a long way to fix low milk prices.

December Federal Order class prices were released on the final day of the year and were the highest prices of the year:

-The Class II price for December is $14.25/cwt., an increase of $1.01 from November
-Class III is $14.98, an increase of $0.90
-Class IV was $15.01, an increase of $1.76

These prices certainly are welcomed but seemingly short-lived. The weakness in cheese has quickly turned futures prices lower. Traders currently feel January Class III futures may be about $14.22, down about 60 cents from the middle of December. February futures have now fallen below $14.00 and the lowest futures price it has been since early September.  We should not be surprised with this. After all, the November cold storage report indicated an unprecedented increase in American cheese stocks.

In records dating back to 1980, this is the first time November stocks were higher than October. The aggressive purchasing that took place over the past few months by two main buyers was for the purpose of filling orders but also for the purpose of building stocks as a hedge against potential rising prices during the year. Block cheese price was expected to decline once buyers became less aggressive and manufacturers wanted to reduce inventory through the end of the year. Those who have purchased put options and/or implemented fence strategies, as previously recommended, have their downside protected, putting themselves in a much better financial position.   

A higher average milk price for 2010 certainly provides us with hope. Along with this is a better milk/feed ratio. The ratio for December climbed to 2.38, the highest ratio since January 2008. Grain and hay prices remained relatively stable the past few months while milk price has been improving.

This still is not a very good ratio, but one that provides some underlying support for a potential better ratio later, getting milk prices back to breakeven at least. The problem we are facing this year is that a great milk price is needed to get back on track to improving equity.

Numerous positive things have happened in the dairy industry over the past year, but low milk prices overshadowed them all. The Class III price average for 2009 was $11.36, nearly matching the 2003 average. Currently, the USDA estimates a Class III price average in 2010 of $15.55 and an all-milk price of $16.75. We can only hope this will be achieved and then some.

The current marketing recommendation is to hold off on contracting any more feed for this year. The market is setting up for a price retracement in grains. Wait for this price retracement before establishing further feed price protection.

Upcoming reports to watch for are:

- the California Class I price announcement on Jan. 11
- the World Agricultural Supply and Demand report on Jan. 12
- the December Milk Production report on Jan. 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 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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