Futures Contracts for 2015 Show Less Optimism

Published on: 19:25PM Sep 15, 2014

Outside factors are becoming more negative to sustained high milk prices.

There is a growing bearishness for 2015 milk prices being exhibited. For much of the summer, Class III milk prices have been hovering around the $18.00 price level or higher, posting little change for the yearly average from week to week.

However, that has changed over the past week or so. Only the January futures contract now remains above $18.00 for next year. Many of the other contracts have declined nearly 50 cents despite rising cheese and butter prices. This puts most Class III futures contracts for 2015 more than $6.50 below the current price expected for this month.

Due to the method of calculating price for the Federal Orders, the September contract is virtually priced and will move very little from now through the settlement date of Oct. 1. Thus, we are looking at a record high Class III milk price for September. Later, contracts are susceptible to underlying price movement as was experienced last week when October and November posted limit down price moves one day, not because of cash price weakness, but because of the perception that cash prices might be nearing a threshold at which buyers may not bid higher. Outside factors are becoming more negative to sustained high milk prices.

Milk prices have remained stronger for a greater length of time than anyone had anticipated in the face of steadily declining world dairy prices as well as steadily declining grain prices. There are a few exceptions, with soybean meal being one of them. Tight soybean supply and crush rates have resulted in continued high soybean meal prices with strong premiums over cash. With the September contract now history and October soybean meal futures $70.00 per ton lower and a large crop on the verge of being harvested, meal prices should decline. In fact, there is a strong possibility soybean meal futures may fall to $300 per ton or below by the time the harvest is in and the bins are full.

Milk production has increased substantially as indicated on the July milk production report, with some analysts expecting continued growth of around 4.0% for the rest of the year. Increasing cow numbers and production per cow will fill the milk pipeline. This is being readily absorbed right now as demand is high, and stocks of dairy products are lower than desired. This created the market frenzy we are experiencing as buyers are purchasing to fill orders and build supply to satisfy customers. This will come to an end as end-of-the-year holiday-buying slows and supply becomes more readily available. That is what the futures market is currently reflecting: a time when supply will exceed demand. What the futures market is showing is a hard pill to swallow.

If current milk futures are a reflection of where milk prices are headed next year, then there will be a substantial reduction in income over feed costs. It will still be profitable due to declining grain prices, but the balance sheets will be tightened.

This brings up the subject of the Margin Protection Program available through the farm bill. It certainly looks as if there is a strong possibility of payments being received depending on the level that is chosen for coverage in 2015. So, it is a good idea to sign up for the program now in order to get in the system at your convenience and then chose your level by the end of November when there may be a clearer picture of price potential.

But do not use this program as the only method of income protection. It pays only when the national income over feed cost falls below the level you choose. It does not protect milk price. It protects margin. Milk price could fall and grain price could fall and you still may not be paid at the income over feed cost level you choose. The Margin Protection Program and marketing need to be used in conjunction with each other to enhance profitability.

Upcoming reports:

- October Federal Order Class I price
- August Milk Product report on Sept. 19
- August Cold Storage report on Sept. 22
- August Livestock Slaughter report on Sept. 25
- September Agricultural Prices report on Sept. 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. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this communication.