Dairy markets continue to remain sideways and following them is somewhat like watching paint day. The positive aspect of this is that it appears to be a balanced market. Buyers and sellers are accomplishing business in a tight price range. Fundamentals have been much the same since the beginning of the year giving buyers confidence to continue to purchase and build inventory despite sufficient supply.
Last year is fresh on everyone’s mind and steps are being taken to eliminate the price volatility experienced last year. Buyers are likely to overbuy this year feeling there is less risk having greater supply on hand than not having enough and potentially having to purchase at higher prices later in the year.
Monthly cold storage figures for total cheese indicates the level of supply in inventory during February is now at the highest level since May 2014 and the highest level for the month of February since 2013. American cheese stocks are at the highest level since August 2014 and are exceeding the previous year. Butter is exhibiting a similar pattern. February butter stocks were the highest since June 2014. This indicates demand is being met and extra is being put away for later demand.
It was anticipated stocks could increase somewhat rapidly this year until exports would improve and that seems to be what is taking place. However, figures show that inventory is not really increasing much more than usual indicating overall domestic demand is good. We certainly hope this will continue. If the U.S. will become competitive in the world arena again, boosting exports to level seen last year, milk prices will perform much better than expected and may exceed current futures prices currently being traded for later this year.
World prices will have a large impact on domestic prices. If exports remains slower than last year, then the outlook for late year prices may dim as inventory will then build more rapidly through the spring and summer. This would allow for more supply to be on hand for late year demand keeping a lid on price potential. Global Dairy Trade auction prices had been performing well since late last year. However, the recent action showed a substantial decline of 8.8% for the trade weighted average.
In a recent interview of Australia and New Zealand Banking Group Limited (ANZ Bank) by the Wall Street Journal, they indicate “there now appears to be a material risk that much of the improvement in prices seen in February will unwind over the next two months," says ANZ Bank. It notes the general improvement in conditions saw Fonterra add more product. It also says market sentiment may be weighed by the fact that most buyers appear to have their needs covered for the second quarter as well as uncertainty over European milk supply post-quota removal on April 1. "There are a lot of conflicting views on whether or not milk supply will kick-up due to the removal of the quotas, but what is being reported is that many buyers have disappeared from the market as they have adequate cover for now and can afford to take a wait-and-see approach,"
What this indicates and what underlying cash prices have been doing is that price may remain somewhat in limbo for the foreseeable future. What does this mean and what should I do? It means that prices may remain supported are current levels and if so futures prices will eliminate premiums that are currently being carried as futures converge to cash.
My recommendation is to look at fence strategies for the second half of the year. Purchase at-the-money puts and sell calls $1.25 higher for a cost of 50 cents. Adjust the spread according to what you need to accomplish by moving either the puts or calls to lower purchase price or to improve upside price potential. Closer months may need the spread tightened due to less time value premium.
-Quarterly Grain stocks report on March 31
-Prospective Plantings report on March 31
-March Federal Order class prices on April 1
-March California Class 4a and 4b prices on April 1
-February Dairy Products report on April 2
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.
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