Dairy Traders Show Extreme Excitement

Published on: 12:23PM Jan 24, 2011

Floor traders are buying everything they can get their hands on, betting on higher milk prices. But caution still needs to be exercised.

Dairy markets have turned bullish and traders are falling over each other trying to purchase futures contracts across the board.
The largest gains have been seen in Class III and Class IV milk futures. Class III futures have far exceeded the movement in the underlying cash markets, but nevertheless, the anticipation is for higher prices. The combination of buying interest and short-covering from previously sold positions has moved futures dramatically.
Take last week, for example. The block cheese price remained steady for the week while the barrel price increased 3.5 cents. This movement along with the weekly NASS average for the week for nonfat dry milk and dry whey equated to a 23-cent increase in Class III price and a 30-cent increase in Class IV. However, the February Class III contract increased 98 cents while the March contract jumped $1.12.  Class IV futures were a bit more realistic, with the February contract increasing 20 cents while March increased 60 cents.
Floor traders are buying everything they can get their hands on and are holding a lot of long positions. Their bet is that higher milk prices are coming and are long overdue, based on high feed prices, higher international prices and heavier culling due to high cull cow prices.
International demand has been good, and prices have been increasing. The latest Fonterra auction showed slightly higher prices for Whole Milk Powder, Buttermilk Power, and Skim Milk Powder while Anhydrous Milk Fat price slipped slightly.
Over the past two weeks, the front-month March corn price increased 63.5 cents, soybeans gained 47.25 cents, and soybean meal gained $17.20 per ton. This continues to add some underlying support to higher milk prices. Grain markets will be very volatile as spring planting comes into focus.
December dairy cattle slaughter totaled 265,000 head, an increase of 34,000 from a year earlier and up 24,000 from November. Slaughter has been higher than the previous year for the past four months. However, the final tally for the year shows slaughter 10,000 head lower than 2009.
This all sounds good, but caution still needs to be exercised here. The market certainly is not bearish, but it may not be as bullish as many seem to think it is and by what is being exhibited by the trade. Either the underlying cash will need to increase consistently or the extra premium will need to come out of the market.
December cold storage was somewhat of a surprise as cheese and butter stocks increased. American cheese increased one percent while butter stocks jumped 17%. It was anticipated stocks would decrease due to good holiday demand. Cheese stocks ended 2010 at 1.026 billion lb., up 6% from the previous year. There were only two months this year during which cheese stocks decreased from the previous month. The general pattern is that stocks decline the second half of the year. Butter stocks increased only two months of the year.
Milk production continues show gains with December production up 2.5% from a year earlier. The surprise on the report was the increase in cow numbers of 16,000 head from November. I have already heard dairy farmers talking of increasing cow numbers to take advantage of the higher prices that milk futures are suggesting. Of course, high feed prices will be a problem for profitability, but those who have hedged feed prices or grow their own feed will be in a lot better position.
My recommendation is to hold off on further hedging using fence positions. With the extra premium in the market right now, put options should be established. Options at any strike price at $16.00 or above for 35-45 cents will protect against a turn in the market. The goal is to implement a strategy that will leave the upside open to take advantage of higher prices if they continue.
Upcoming reports:
  • Commercial disappearance – Jan. 25
  • Bi-annual cattle inventory report – Jan. 28
  • Agricultural prices report – Jan. 31
  • Dairy Products report – Feb. 1
  • Fonterra auction – Feb. 1
  • California Class 4a/4b prices – Feb. 1
  • January federal order class prices – Feb. 4
  • World Agricultural Supply and Demand report – Feb. 9
  • California Class I – Feb. 10

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.