After a strong price run-up last year, nonfat dry milk prices have declined. Now, discounts are being offered to entice buyers and move some inventory.
April has been another month of record milk prices. It does, however, look like that is gong to be the end of it for the rest of the year unless cheese prices can rally and make new highs. That is unlikely unless milk production will be affected enough to result in a shortage later in the year. World prices weakening on the last five consecutive Global Dairy Trade auctions -- and indications that the Chinese pipeline has been filled, resulting in exports moderating -- give the impression prices may settle back a bit. The likelihood of prices falling substantially is not very great, but a lower trading range may eventually be established. However, that lower range will be historically high.
High milk prices so far this year have done little in the way of limiting demand. Any decrease in demand that may have taken place domestically has been made up by strong exports. Cheese inventory was not able to build until March, during which the increase was light, with inventory still remaining below last year. This provides the confidence needed for manufacturers to push production with little concern that prices will drop, leaving them holding high-priced inventory. High milk prices also provide dairy farmers with the incentive to push production as much as possible.
March dairy cattle slaughter totaled 246,000 head. This was 9,000 head more than February (a short month), but down 28,000 head from last year. This is the lowest monthly slaughter based on a 30-day month since June 2013. Cows are being held on to as record milk prices are becoming somewhat normal. Replacement heifers are in good demand, but somewhat difficult to find, limiting the increase of cow numbers in the nation’s herd. This desire is not going to go away as long as milk prices are high and feed prices reasonable.
One dairy product that bears watching is Grade A nonfat dry milk. Prices took charge during the second half of 2013, with an increase of 47 cents per pound. Demand was high and supply was tight. But high price did what it is supposed to do, and that is limit demand or increase production or both. Price has now declined 30 cents from the high as demand slowed and inventories are building. The nonfat price on the daily spot market has now declined to the lowest level since Sept. 5, 2013. Discounts are being offered in some instances in order entice buyers and move some inventory. With Grade A nonfat dry milk price leading the charge on the way up, one needs to be watchful over price weakness being a forerunner of what may come.
I continue to recommend fence strategies consisting of purchasing put options near where futures are trading and selling call options $1.50-$2.00 above the market. For those with no desire to deal with potential margin calls, a put spread strategy may be the next best option. This consists of purchasing a put option near where the market is trading and selling a put option $1.25 below. This reduces the cost of the premium, limits downside protection to the level of the sold put option, and also leaves the upside open. If milk prices decline, some price protection will be accomplished. This strategy is one that is better than doing nothing.
- Agricultural Prices report on April 30
- April Federal Order class prices on April 30
- March Dairy Product Production report on May 1
- World Agricultural Supply and Demand report on May 9
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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