By Robin Schmahl
USDA’s discussion of changing dairy support prices has come to fruition. Enough pressure has been put on the government to cause them to react. Agricultural Secretary Tom Vilsack stated that, “The Obama Administration is committed to pursuing all options to help dairy producers.”
As of August 1, support price for block cheese is $1.31/lb., $1.28 for barrels, and $0.92 for nonfat dry milk. These support prices will remain in effect through October at which time they will drop back unless other actions are taken. The previous support price for block cheese was $1.13, barrels at $1.10, and nonfat dry milk at $0.80/lb. Initially, discussion revolved around increasing the support price for blocks to $1.19, barrels to $1.16, and nonfat dry milk to $0.84/lb. So, this was a surprise to the industry and the milk futures market.
Class III futures contracts immediately reacted to the news from the USDA with some 2009 contracts nearly moving the daily limit of 75 cents higher. However, the gains were not maintained and only minor support was seen in 2010 contracts. More futures price strength will likely be realized as long as cheese prices increase. This was the initial reaction followed by cheese prices increasing to keep pace with the new support levels.
We need to keep things in perspective with the support price changes. First, support price only means that the Commodity Credit Corporation (CCC) is a willing buyer at that level. If it is not offered to them, they will not purchase it. In order to sell cheese to them it needs to meet grading and packaging specifications which costs in the area of 7 cents per pound. This is why cheese trades below support without any being offered to the CCC as it had done during two period of time this year. USDA stated in their news release that they anticipate the support price increases would result in the purchase of 75 million pounds of cheese and an additional 150 million pounds of nonfat dry milk.
The other thing that needs to be realized is the new support level translates to a Class III price of $11.72, given the current butter and NASS weekly whey price and a Class IV price of $11.06. This would be a significant improvement over the July Class III price of $9.97, but would be a far cry from profitability.
My concern is what will happen if the USDA does not extend the higher support prices past October. Will prices fall back down due to current heavy inventories? I believe support prices were raised temporarily with hopes that end of the year holiday demand would then take over and support higher prices. However, high inventories will be an issue through the end of the year and will be carried over into next year.
Upcoming reports to watch for are the June Dairy Products report on August 4; the World Supply and Demand and Crop Production report on August 12; Fluid milk sales on August 14; and the July Milk Production report on August 18.
--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.
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