A Strong Close to a Good Year

Published on: 12:32PM Dec 12, 2011

While dairy prices will finish the year strong, the New Year will turn some new leaves, starting with the European Union somatic cell requirement taking effect.

Nearly half of December is behind us. The common phrase heard with Christmas and the New Year just ahead is, “Where has the year gone?” Of course, there are always 24 hours in a day that neither speed up nor slow down, but time always has a way to slip past and, before we know it, we are in the next week, month or year.
Now that the calendar is nearly half way through December, the Federal Order prices are all but set for the month. Generally, half way through the month, futures prices for that month will begin to flat-line with very little price fluctuation. December Class III futures are now hovering around $18.55 and Class IV futures near $17.05. Prices will certainly finish the year strong.
Milk futures are not quite as rosy for 2012, but prices are still historically good. The interesting aspect is that the price difference between the high and low of next year is only 45 cents. If this were to be realized, it would closely resemble 1983. That year, the base Federal Order milk price only showed a price fluctuation of 45 cents. There were a few other years in the early 1980s that did not exhibit much price fluctuation, but overall volatility has increased significantly. This year alone has had a price range in Class III announced of $8.19, and Class IV posting a range of $4.63. It is very unusual to see neither a price premium nor much of a price discount for the next year’s futures contracts at the end of a year.
I do not think next year’s prices will be void of volatility. Who thought cheese prices would drop back to spring levels during the month of December? Yet, here we are. Holiday demand is satisfied with only fill-in buying required. Buyers are turning their attention to expected demand and orders for early 2012. However, even though there is buyer interest, there is plenty showing up at the spot market at current prices. Manufacturers want to reduce inventory by the end of the year.
The New Year will turn some new leaves, starting with the European Union somatic cell requirement taking effect. Beginning Jan. 1, any milk or products destined for the EU will need to meet the requirements of the “European Health Certification Program.” This means that raw milk will need to have a somatic cell count of 400,000 m/L or less.
Now don’t get this confused with the earlier discussion this year to lower the U.S. somatic cell count to 400,000, which was postponed. This is just for milk products or ingredients that will be shipped to the EU. Suppliers, processors and applicants who export dairy products will be responsible for maintaining records to trace their products back to verify meeting these requirements. Farm-level milk will need to comply with the requirements and will be tested accordingly for both Grade A and Grade B milk that is bound for the export market to the EU. All farms will establish rolling three-month means to determine the average mean for the following month. Example: January, February and March will be used to determine April. Then February, March and April will determine the mean or average for May and so on.
One has to wonder if this may slow the desire to export dairy products or ingredients to the EU. This is going to require more paper work to keep everything accounted for. A revival of the desire to establish a national requirement of a 400,000 cell count limit may surface soon. This could potentially make the paper trail somewhat easier.
More and more of these requirements will need to be met in order to compete in the world markets.
Upcoming reports:
-          November Milk Production report on Dec. 19
-          Fonterra auction of Dec. 20
-          November Cold Storage report on Dec. 22
-          Livestock Slaughter report on Dec. 23
-          January Federal Order Class I price on Dec. 23
-          Commercial disappearance on Dec. 27
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 website 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 my not be suitable for everyone. Those acting on this information are responsible for their own actions.