Spring Flush Should Not Be Burdensome for Dairy Market

Published on: 11:12AM Apr 18, 2011

The seasonal boost in milk output may not be as prominent as it once was, but nevertheless it still is prevalent. Just look at the monthly milk production reports to see the seasonal increase in production during the spring of the year.

Volatility in the dairy futures markets seems to have settled down somewhat. Underlying cash prices are more stable and seem to be settling into a trading range. Spring flush is upon us and the availability of milk is such that manufacturers and bottlers are receiving sufficient supply. Milk production continues to increase seasonally, running above a year ago.

I have repeatedly had the discussion with people regarding spring flush. They think there is no such thing as spring flush anymore due to the change in dairying over the past few decades. They feel spring flush is discussed too much, sending the wrong signals to the market and influencing traders to suppress the market.

 I would have to agree that spring flush may not be as prominent as it once was, but nevertheless it still is prevalent. All one has to do is look at the monthly milk production reports to see the seasonal increase in production during the spring of the year. Warmer weather, increased cow comfort, some cows getting out on pasture, and some changes in rations are enough to increase per-cow output.

USDA estimates milk production this year to be 3.2 billion lb. higher than in 2010, despite higher feed prices and good cull cow prices. It currently estimates production to reach 196.0 billion lb.

Despite the higher production, USDA increased the average cheese price 5 cents to $1.7250 per lb. over its estimate on the previous World Agricultural Supply and Demand report. Butter price is expected to average $1.78 with the all-milk price to average $18.40. Milk price is a vast improvement over last year’s $16.29 average. However, with higher feed prices, the result is essentially trading dollars for dollars.

So far, production has not increased to the point where “distressed milk” is available. Milk supply is not burdensome requiring price discounts in order to entice buyers to purchase it. Current plant capacity is sufficient and has more room to absorb the extra supply that is available. Price discounts on milk are not expected to materialize this year due to good overall demand and plant capacity. Manufacturers are willing to purchase excess milk for processing but are attempting to keep on-hand supply limited by moving it to the market place quickly.

The latest Dairy Products report showed cheese and butter output above year ago levels. For the month of February, American cheese production totaled 329 million lb., up 2.6 %; Italian type cheese production totaled 352 million lb., up 6.6% resulting in total cheese production at 807 million lb., up 4.1%. Butter production for February was 6.4% higher at 150 million lb. As a result, inventory is increasing seasonally. Butter stocks have a long way to go before they will be comfortable while cheese stocks are at the highest levels since the mid-1980s.

So what, if anything, should be done for marketing? It looks as if cheese and butter prices may chop in a sideways range for a period of time limiting price swings. My recommendation is to set target prices for fence position to establish a floor and allow some upside potential. Look to implement the purchase of $17.50 put options and sell $19.50 call options against them for a cost of 40-50 cents. A put option alone can be purchased in closer months. The goal is to protect prices from falling. At the same time, purchase call option spreads in corn and soybean meal on a price dip to protect feed prices.

Upcoming reports:

- March Milk Production Report on April 19
- Fonterra auction on April 19
- March Cold Storage report on April 21
- March Dairy Cattle Slaughter on April 21
- CME will be closed for Good Friday on April 22
- May Class I price on April 22
- Commercial disappearance on April 26
- Dairy Products annual report on April 27
- April Class prices on April 29
- Agricultural Prices report on April 29

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.