Faltering Fundamentals Pressure the Dairy Market

Published on: 10:41AM Mar 19, 2012

Projected weaker demand is expected to lower overall dairy prices and profitability this year. U.S farmers are not the only ones looking at lower milk prices.

January exports of dairy products were mixed. Fluid milk and cream exports declined 5.5 % from a year earlier. Some of this is due to economic situations and some is due to stronger milk production in other areas of the world.
Cheese exports increased 3%, totaling 19,415 metric tons. The percentage increase was not as high as it was last year. Nevertheless, it continues to show strength. Exports of dry whey increased 2.6% over last year totaling 38,298/mt. Exports are expected to continue to improve this year
Butter exports are the laggard. Exports have been running below year earlier levels since June 2011. January exports were down 27.4% to 3,003 metric tons. Despite increasing butter inventory, buyers have recently been aggressive filling orders for the Easter season. Low prices triggered interest to build inventory for anticipated higher prices as the year progresses. Butter futures suggest the price will continue to increase through November.
The Food and Agriculture Policy Research Institute (FAPRI) indicated in its latest baseline projections report that overall dairy prices and profitability would be lower this year than in 2011. “There is concern that demand won’t be quite as strong as earlier estimates and could push prices lower,” FAPRI said. “We do not expect, on average, for dairy producers to make great profits. But in any given year, there could be a very positive or very negative situation. That’s one of the many reasons why there’s been a push by Congress to try to make changes to dairy legislation that could smooth out some of those variations.”
Discussion is being held on the farm bill, with some thinking it could be done as early as June. However, it is very unlikely a revised farm bill would be done as early as June. The pattern has been that it is not settled until it absolutely needs to be, which is generally at the end of the year.
U.S. dairy farmers are not alone in dealing with lower milk prices. New Zealand's milk giant Fonterra Co-Operative Group Ltd., producer of about a third of the world's traded dairy products, forecast a lower payout to farmers for the season ending May 31. Fonterra said global uncertainty and concerns over China's economic outlook means dairy prices are likely to remain under pressure until at least mid-2012. One of the reasons cited was the news that China swung to a massive trade deficit in February.
Fluid milk sales have been slowing and continue to slow with January sales, down 2.7%. This is another month in the long line of months posting declines. One company is being innovative with its release of Cotton Candy milk. The company, Shatto Milk, based in Osborn, Mo., is releasing this flavored milk soon. It said, "We are extremely excited to offer our first limited release product. For years, customers have been requesting this unique flavor."
The company said the milk has a creamy base and tastes like a glass of melted cotton candy. I am not sure how appealing that will be to the general public. It will be interesting to see how well sales will fare during the limited release. Companies are experimenting with many flavors in the attempt to increase profits and improve demand. Jack-in-the-Box restaurants released a bacon-flavored shake as a limited release a few months ago.
Milk futures recently bounced over $1.00 per cwt after establishing a bottom in cheese prices. Current fundamentals do not look very promising for an extended rally in price. I recommend using fence positions consisting of purchasing at-the-money put options and selling call options $1.00-$1.50 above the market. Put options can be established in April and May for a reasonable cost. Cheese demand has slowed recently and is a concern in the industry.
Upcoming reports:
- Fonterra auction on March 20
- February Cold Storage report on March 22
- April Federal Order Class I price announcement on March 23
- February Livestock Slaughter report on March 23
- Commercial disappearance on March 27
- Agricultural Prices report on March 29
- March Federal Order class prices on March 30
- Prospective Plantings and Quarterly Grain Stocks reports on March 30

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.