Milk Prices Look Better, But Grain Prices Soar

Published on: 12:44PM Sep 20, 2010

Increasing milk prices are a welcome sight, but the realization of increased profitability may not be as great.

Milk prices are on their way up. Futures contracts through the first few months of 2011 have increased significantly due to the underlying butter and cheese prices remaining nearly steady over the past two weeks. The October Class I price was announced at $16.58, the highest it has been since November 2008. August’s Class III price of $15.18 was the highest monthly price since December 2008.
Current futures indicate September’s price will be near $16.30, which would make it the highest since October 2008. September’s price is almost a given as traders have already factored in the past month of spot trading price activity. The September contract will basically flat line during the last half of the month with very little price movement.
As long as underlying cash prices remain steady, the subsequent contracts will continue to increase as they move closer to cash. Class III futures contracts in 2011 have ceased declining, with traders liquidating some of their previously sold contracts. The idea is that a significant decline in cheese prices has already been factored in. Traders seemed to realize 2011 futures have fallen further than they need to and has triggered short-covering.  
In fact, the latest USDA World Agricultural Supply and Demand report indicated a slight increase in expected milk prices for 2011. The estimated all-milk price range was raised 35 cents to $15.85-$16.85 per cwt. Although not as good as the expected average price of $16.35, it is at least better than earlier expected.
The interesting aspect about USDA increasing the estimated all-milk price is that it also increased estimated milk production. Production was raised 1.6 billion pounds to 196.2 billion pounds. Since USDA first released its estimate in May, it increased estimated production 3.2 billion pounds. The economy still is in question with some analysts expecting a double-dip while some are not. A growing economy will be the key to long-term demand growth and better milk prices.
Increasing milk prices are a welcome sight, but the realization of increased profitability may not be as great. USDA released its first estimated grain prices on the same report. The initial average farm-level corn price for 2010/11 is expected to range from $3.20-$3.80. Really, this is not much different than the estimated price for the past marketing year, which ended Aug. 31, with USDA currently projecting an average price of $3.50-$3.70.
However, the current market is concerned that corn and soybean production may not be as large as USDA is predicting. Corn futures have surpassed the $5.00 level and soybeans are now pushing near $11.00. Export sales have been good, with China being a continual big buyer of soybeans as well as a buyer of corn. Fund traders have been pushing futures and now own record long positions. The reality is that continued higher grain prices will squeeze profitability by increasing feed prices. It seems like a repeat of 2008 when grain prices increased dramatically during a time of high milk prices. The end result was we were just trading dollars for dollars.
The stability in butter and cheese prices is causing some to think this may be as high as prices will go. Buyers certainly are not aggressively going after cheese or butter, no matter what the cost, but are content to purchase what comes to the market. Trading activity has been very light with most business being taken care of through regular channels in the country.
Current futures contracts are in a different posture, which does not lend itself to attractive hedging opportunities in 2011 contracts due to Class III futures already having approximately a 20-cent decline in cheese prices factored in. The opportunity for hedging lies in the November-thru-January contracts as a decrease in cheese prices will have an immediate impact on these months.
Put options near current futures are preferred to establish a floor. Fence positions can also be established that allows for some upside potential, but the difference between strike prices needs to be narrowed to about $1.00-$1.25. Do not become complacent in the idea that milk price will need to go higher due to higher grain prices. Milk price will be determined by supply and demand. Farmers are pushing milk production to make up for lost income over the past year-and-a-half.
Upcoming reports:
-          August Cold Storage on September 22
-          August Livestock Slaughter on September 24
-          Commercial Disappearance on September 28
-          Agricultural Price report on September 29
-          September federal order Class price on October 1
-          California 4a/b price on October 1
-          Dairy Products report on October 4
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
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.