Feed Price Outlook Improves After Acreage Report

Published on: 09:25AM Jul 11, 2011

Feed prices for this year have been a real concern for dairy operations. Corn prices moved up consistently from November through March making very few price corrections. Since then the market has been very volatile with significant declines followed by new contract highs. Demand was the initial driver while weather took over as planting season unfolded. Delayed planting and flooding resulted in new price highs. Tight ending stocks and the projection for fewer acres than needed spurred buying interest in futures contracts.

USDA released their “Planted Acreage” report June 30 which changed the market tone immediately. While the trade was anticipating planted acreage to be 90.78 million acres, USDA came out with a shocker and indicated plantings at 92.3 million acres – slight over 100,000 more acres than the March report. This stuck the proverbial “fork” in the market resulting in frenzied selling sweeping through the grain complex. September futures fell 71 cents over the next two days following the report. Since June 10, the date of the World Agricultural Supply and Demand report, September corn futures fell $1.49 per bushel into the closing bell on Friday, July 1.

Soybean planted acreage on the same report was the opposite showing a decrease of 1.4 million acres from the March report to a planted acreage of 75.2 million. Despite the bullishness of this report, future initially fell in sympathy with corn, but not to the same extent. In fact, since the World Agricultural Supply and Demand report on June 10, soybean futures fell 70 cents per bushel by July 1.

This was good news for dairy producers as the outlook for lower feed prices became brighter. Buyers of feed were ecstatic that analysts and others who were calling for $10.00 per bushel corn or higher were wrong – at least for the time being.  

Lest we be comfortable with the setback in price, remember that there is a lot of the growing season to go through. Pollination will be critical and there is always the threat of an early frost. USDA will also resurvey planted acreage in South Dakota, North Dakota, Montana, and Minnesota with updated planted acreage to be released on the World Agricultural Supply and Demand report scheduled to be released on August 11.

On the other hand, milk prices continue to increase. The June federal order Class III price was announced at $19.11, up $2.59 from May and $5.49 from a year earlier. Traders are projecting a July Class III price of $20.94 at the time of this writing. If realized, this would be the highest price since July 2007 and $7.16 over a year earlier. This sounds real good but remember the milk/feed ratio has changed very little over the past year. September corn price a year ago was $3.85. In essence, we are trading dollars for dollars.

The bottom line is that you need to be proactive and take advantage of the decline in grain prices to hedge feed prices. Forward contract some of your feed needs if your supplier is offering that as an option. Otherwise, use the markets to protect against higher prices.

My recommendation is to use option contracts for December corn and November soybeans or soybean meal. This will allow you to leave the bottom open in case lower prices were to unfold. Call option spreads are the preferred strategy due to increase option value from volatility. Purchase a December at-the-money calls while at the same time selling call options 70-80 cents higher. These can be done for about 25 cents. This strategy requires only the difference in premium of the options to be paid. Upside protection will be realized until the strike price of the sold call option. A follow up strategy will need to be initiated if price move higher than the sold call option.

Soybeans and soybean meal call spread will follow the same principle only with different premiums and different strike prices.

Do not be complacent over the fact that more corn acres have been planted which will keep prices in check. The trade is already taking about a possible high pressure ridge forming over the Midwest by mid-July. An adjustment in planted acres in August could send us off to the races again.

Upcoming reports:

  • World Agricultural Supply and Demand report on July 12
  • Fluid milk sales on July 15
  • June Milk Production report on July 19
  • Fonterra auction on July 19
  • August Class I price on July 22
  • June Livestock Slaughter report on July 22
  • June Monthly Cold Storage report on July 22