End of 2011’s Dairy Market Holds Similarities to 2010

Published on: 16:55PM Dec 22, 2011

The end of the year is shaping up to be very similar to the end of last year, only at a different price level. Milk prices are declining much like they did last year into the first of the year. High feed prices will need to be managed aggressively in 2012.

The end of the year is shaping up to be very similar to the end of last year, only at a different price level. Milk prices are declining much like they did last year into the first of the year.
November’s Class III price was $19.07, the highest November price since 2007. December is virtually done pricing except for the USDA announcing it. The trade has it pegged at $18.70, which would be a decrease of 37 cents from November.
January futures are trading at $17.22 and are following cash closely. One week of the January contract is already priced, and price fluctuations should become less pronounced as the next three weeks unfold. Eventually, the contract will flat-line until price is officially announced. If the current price is realized, this would be a decline of $1.48 from December. Subsequent contracts in 2012 are posting an average of $17.10.
A year ago, the November Class III price was $15.44 and then dropped 46 cents to $14.98 in December. In January, the price dropped to $13.48 down 50 cents. Price then jumped up to $17.00 in February. So, the pattern is similar with futures contracts for 2012 and posting very little price premium just like they did last year. Traders are not anticipating a significant price increase next year.
Last year, February futures remained close to the January price until Jan. 7 when the futures market rallied over $3.00 following the 66-cent increase in cheese price.
It is unlikely the market could duplicate the same price increase this year as that would push Class III price over $20.00 and cheese price near $2.20. Strong milk production and slowed demand will keep a lid on price. World price would not support that size rally at this point. The latest Fonterra auction had cheddar cheese price at $1.63 per pound.
November cheese inventory a year ago was about 40.0 million pounds less than this year. Cheese and curd exports are about 3,000/MT higher than a year earlier, slightly lower than the growth of the previous year when exports increased 4,600/MT over 2009.
Lest you think the similarities would indicate no need to implement some form of price protection, bear in mind the typical price patterns and cycles of the market. The pattern between higher and lower prices is generally 2 1/2 to 3 years. Lower prices were experienced in 2003, 2006 and again in 2009. The cycle could be repeated in 2012.
The March corn price in 2011 was nearly identical to the current futures price. Price then rallied about $1.00 per bushel by March. This certainly could happen again if funds come back into the market and the battle for acres intensifies. Current projections indicate increased corn acres will be planted keeping a lid on price. However, weather is always the wild card.
Be prepared as a feed buyer. With corn stocks as low as they are, any weather problems could develop into a significant price rally over a short period of time. Those who already covered feed needs with call options or call option spreads should consider rolling them down to gain better protection.
Milk production continues to increase with November milk production up 1.8% over the previous year. Milk production for the first three quarters of the year was 1.6% higher than the same time period in 2010. Cow numbers are up 91,000 head over a year earlier. Texas continues to lead the charge in percent of milk production growth with an increase in November of 8.4%. Despite adverse weather this year, the state has increased milk production every month. In fact, the last time Texas posted negative production growth over the previous year was August 2010.
All in all, 2011 has been a good year for milk prices but not necessarily for profitability due to high feed prices. These will need to be managed as aggressively in 2012.
Upcoming reports:
- Agricultural Prices report on Dec. 30
- December Federal Order class price on Dec. 30
- Dairy Products report on Jan. 3
- Fonterra auction on Jan. 3
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.