High Feed Prices to Eventually Impact Production

Published on: 13:00PM Dec 27, 2010


We are drawing to the end of another year that has been both exciting and frustrating.
Milk prices were able to move to a level that was not anticipated earlier in the year, with Class III prices reaching above $16.00/cwt. for September and October, while Classes I, II and IV were able to move above $17.00. This certainly was a welcomed sight, considering continued strong milk production and growing cheese stocks.
Exports increased significantly versus a year ago, helping to keep product moving. Domestic demand was better than last year as well, but, even with these improvements, stocks of cheese increased through most of the year. August and November were the only months to show a decrease in cheese stocks, according to USDA’s “Cold Storage” reports.
December’s figures will not be released until January, but it looks like December will also show a decrease. Normally, stocks will increase during the first half of the year and decrease the second half. So, despite some good movement domestically and internationally, stocks continued to grow. We can take comfort in the fact that milk prices were as high as they were despite this. This give us hope that next year may be better if demand will increase further.
Next year will be a real challenge as far as feed prices are concerned. Weather patterns in other parts of the world have underpinned the grain markets as more concern over production is developing as time moves forward. The dryness in Argentina is at the forefront as it is the second-largest corn producing country. Corn is moving through pollination stage and continued dryness will prompt forecasters to reduce production.
This may increase export potential for the U.S., which is already facing tight carryover, according to projections. Any glitch in weather next spring or not enough acres being planted could cause the market to explode. The job of higher prices is to find a level at which demand will be reduced, and that is what the market will do. The debate over food, feed and fuel will burn brightly again.
Declining milk prices, as we have seen since the peak in October and the outlook presented by Class III futures, will cause many to cull more heavily, which may result in reduced milk production and a tighter market. This may take a few months, but nevertheless will happen.
USDA released its “Livestock Slaughter” report last week, which indicated culling is increasing. Dairy cattle slaughter in November totaled 241,000 head, 10,000 more than October and 32,000 more than a year earlier. This was the highest slaughter for the month of November since 1997. However, the pace of slaughter this year still lags the pace in 2009 by 42,000 head.
The U.S. dairy herd totaled 9.121 million head in November, 30,000 greater than a year ago, according to the November milk production report. It may take a few months to get cow numbers below year earlier levels again.
Butter will be the wild card in 2011 as the current price is not expected to decrease very much. Some believe prices will retrace somewhat early next year, but it is unlikely they will decline very far. November cold storage of butter showed stocks dropped 38.8 million pounds from October to 70.0 million pounds, and are 51% less than a year ago. This level is similar to November stocks in both 2004 and 2005.
It is interesting to note that butter stocks in 2003 were high, similar to what they were in 2009. They then fell the following year, similar to what they have in 2010. However, in 2006, they rebounded again. The question is whether this pattern will hold true again over the next year or two.  
There is no doubt 2011 will be a challenging year. Corn and soybean prices will be high unless end users seek alternatives, slowing demand significantly.
Any dip in grain prices as a result of fund liquidation and/or a price retracement needs to have call options or call option spreads initiated. This will protect further price increases while at the same time leaving the bottom open in order to purchase the physical at a lower price. Price protection will be critical in 2011.
Upcoming reports:
-          December class price on December 30
-          Agricultural Price report on December 30
-          Dairy Products report on January 3
-          California 4b price on January 3
-          Fonterra auction on January 4
-          Fluid milk sales on January 7
-          California Class I price on January 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.