Government Shutdown Affects What We Know about Dairy
Oct 14, 2013
While the lack of reports is leaving us blind about what’s going on across the country, business continues to be done and milk prices see another good month.
The government’s inability to agree on a budget is becoming more ridiculous. The politics involved in this whole situation are making the U.S the laughing stock of the world. Here we are, a democracy with elected officials who cannot work together and come up with a solution for the good of the nation. It is all tied up with party lines, special interest and the positioning for the next election.
Many citizens are furloughed, which is having a growing impact on various areas of the economy. Some goods and services are not being taken care of as usual. Imports and exports of various items and materials are virtually non-existent, resulting in increasing backlogs at shipyards. This has trickled down through many areas of the economy, not only here but the world. This is something that will not be cleared up overnight once a budget is finally adopted.
So far, there is little indication that exports of dairy products have been affected. It is difficult to get an accurate picture of this due to the inability of receiving government reports. If there are no factors that could hinder export demand of dairy products, the hindrance could come from the inability to ship it out as usual. The U.S. does not send a whole boat load of cheese or butter to one place. Products get put on a cargo ship along with other goods. If shipping to a particular country is slower due to reduced inspectors, which could slow the gathering of a full load, it will eventually slow all export movement. However, much of what is purchased for exports generally has a window of shipping time. When CWT agrees to assist in the exports of cheese and butter, it is generally states that it will be shipped over the duration of the next four to six months.
One issue with in the dairy industry is the lack of reports. We have now plowed our way through half of the month of October without the value of any USDA reports. This leaves us blind as to what is going on across the country. Surveys are not being conducted, weekly regional reports are not being released, monthly reports are not being released, etc. Fortunately, the Federal Orders are keeping track of and releasing the weekly National Dairy Product Sales report, providing the industry with critical information for product pricing.
With all of this lack of information, business still needs to be done -- and continues to be done. Trading on the CME spot market has been active, giving traders something to base their trading activity and price direction on. The recent strength in cheese prices has certainly been welcomed as it supports another good month of milk prices. Most of the pricing for October has already been factored in by the trade, with the October futures contract settling into a sideways narrow trading pattern. November will be susceptible to an underlying cash price movement over the next month, making it difficult to predict where milk prices will be. But we do know the current milk/feed ratio is the best it has been since November 2011, and one can only hope the ratio will improve as time moves forward.
Lower corn prices due to better-than-expected yields may translate over into lower milk prices if the historical pattern is followed. Milk production has remained fairly strong despite high grain prices, so one has to wonder how far dairy farmers will push production We generally increase milk production when milk prices are low to make up for the lower prices and generally increase milk production when feed is less expensive and profitability has improved.
My recommendation is to initiate fence strategies for the first six months of 2014 by purchasing $16.50 put options and selling $18.00 call options. These can be done for anywhere from 20-45 cents. This provides a nice parameter while establishing a decent floor. I am concerned for milk prices next year.
Upcoming reports: (tentative dates subject to the government)
- Global Dairy Trade auction on October 15
- Livestock, Dairy, and Poultry report on October 18
- September Milk Production on October 21
- September Cold Storage report on October 22
- Federal Order Class I price on October 23
- September Livestock Slaughter October 24
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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