Lower Grain Prices Provide Window of Opportunity

Published on: 11:34AM Sep 19, 2011

The downward trend in grain prices should be viewed as a gift for hedging feed prices. The volatility in grain is not going to go away this year or next.


Cheese markets have not been very exciting over the past month, with prices for both blocks and barrels remaining in the $1.70s range. Class III futures contracts through December have settled down considerably from their previous volatility. First-half 2012 contracts have virtually traded sideways while later contracts slowly creep higher.

Previous projections from some analysts for continued high milk prices due to high feed prices have fallen by the wayside. With milk supply and manufacturing sufficient to meet current demand, it appears cheese prices will remain in this range for some time. Increasing milk production is enough to satisfy school milk demand as well as fall manufactured product demand. Seasonally, this is the time when buyer interest is heavy. Orders for the end of the year are being placed, and inventory is dipped into to supplement fresh manufactured supply.

Buyers are not concerned over supply at the present time. Demand has improved with lower cheese prices, but it has not improved as much as was anticipated. Cow numbers continue to increase and are expected to increase further. The latest monthly dairy cow slaughter report showed the lowest slaughter since June 2008. Higher milk prices increase the desire to produce more milk despite higher feed prices.

Grain prices appear to have made a top and are trending lower as harvest approaches. USDA reduced corn production on its latest World Agricultural Supply and Demand Estimates (WASDE) report last week, to 12.497 billion bushels. Despite expected production being down significantly from earlier estimates, the current expectation is still 50 million bushels higher than last year. It certainly was a good thing more acres were planted this year.

Soybean production was raised 29 million bushels to 3.085 billion bushels. However, this number is 244 million bushels lower than last year. This report has not been enough to stop the current liquidation phase taking place in grain futures.

The lower trend in grain prices needs to be watched closely for an opportunity to hedge feed prices, either through a forward contract or with call options or call option spreads. The balance sheet for supply and demand for grain is tight. The current trend lower in grain prices should be viewed as a gift and opportunity. Purchase $7.00 March corn call options and sell $7.70 call options for a spread price of 25 cents. If prices fall further, scale in and purchase more feed coverage with the same strategy at lower strike prices. The volatility in grain is not going to go away this year as well as next year.

USDA did not change its price outlook for milk and dairy product prices for 2012 on the WASDE report released last week. The All-Milk price range remained at $17.80 to $18.80. The cheese price is estimated to range from $1.67 to $1.77, with butter in the range of $1.6150 to $1.7450. Of course, this can change significantly, but right now Class III futures are in line with expected prices. The best strategy for now is to focus on protecting feed and to see how dairy prices react as the calendar moves toward the holidays.

Upcoming reports:

- August Cold Storage report on Sept. 22
- August Livestock Slaughter on Sept. 23
- Advanced Class I price on Sept. 23
- Commercial disappearance on Sept. 27
- Agricultural Prices report on Sept. 29
- September Federal Order class prices on Sept. 30
- California 4a/4b prices on Oct. 3
- Dairy Products report on Oct. 3

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He can be reached at 877-256-3253 or through the 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 trading may not be suitable for everyone. Those acting on this information are responsible for their own actions.