Panic and Prices: Think Twice Before Reacting

Published on: 11:39AM Apr 29, 2013

Instant information and world influences often drive dairy markets, but wise traders also follow proven pricing patterns.

It is interesting to note how all of us generally personify the market. We give it a mind and a life. One of the reasons we tend to do this is because it can many times act like an uncontrolled being that moves as it wills. So we have coined the terms, "The market knows where it wants to go" or "Oats knows where corn will go" and a few others.

These phrases are coined because of patterns that have been established over years of trading. This is much like the "Farmers Almanac" or a book I once read entitled, "Weather Wisdom," which recorded the atmospheric events old-timers observed for years and the resulting weather patterns experienced. I would have to say that many of these observations seem to be more accurate than the current weather technology available to us today.

When it comes to marketing, much of the same can be said. Certain market patterns can still be followed and, in the end result, be more accurate than the day-to-day volatility. However, technology and the instant access to information around the world as well as twitter opinions can have a significant affect on day-to-day and well as minute-to-minute trading activity.

This was seen when an Associated Press Twitter account was hacked last week, and false information was transmitted resulting in the stock market "flash crash," only to regain value is short order after the tweet was discovered to be bogus. This is a fearful situation and one that can have significant impact on the markets. Panic produces volatility, but panic is short-lived and should not be a consideration when using the markets for price protection.

Dairy markets have been moving through a situation similar to this over the past few months. Weather in New Zealand and Australia has been the catalyst for Global Dairy Trade auction prices showing dramatic increases over the fear of world supplies tightening as the year progressed.

Figures released by Statistics New Zealand indicated China as the largest importer of dairy products from the country for the first quarter of this year. Exports to China increased 32% from a year earlier. Since 2008, China’s imports from New Zealand have more than tripled. This is getting quite a bit of attention from the industry, especially due to the weather situation New Zealand has been experiencing. If supply from the country is reduced substantially, China will likely be looking for supply from anywhere else it can find it. Interestingly enough, the U.S. was and is the third largest importer from New Zealand, according to the report.

Not only has the market changed as far as instant information and world market influence, but it has also changed from the standpoint of comfortability. Grain markets seem to have become more comfortable with tighter inventory and lower stocks-to-use ratios while, on the other hand, dairy markets seem to be more comfortable with larger inventory.

On the latest "Cold Storage" report released last week by the USDA, American cheese stocks increased 19.2 million pounds from February to 680.2 million pounds, up 4% from last year and the highest stocks since 1986. Swiss cheese stocks increased 4.0 million pounds to 30.5 million pounds, up 6%. Other cheese stocks increased 13.8 million pounds from the previous month to 391.4 million pounds, up 7% over last year. This put total cheese inventory at 1.1 million pounds, 5% from a year ago and the highest since 1986. Butter stocks increased 19.5 million pounds for the month to 254.8 million pounds, 22% higher than last year and the highest stocks for the month of March since 1993. Even with these high inventory levels, the industry feels the market is comfortable and not burdensome.

Upcoming reports:

- April Agricultural Prices report on April 30
- Global Dairy Trade auction on May 1
- April Federal Order class price on May 1
- California Class 4a/4b prices on May 1
- Dairy products report on May 2
- World Agricultural Supply and Demand report on May 10

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 his website.

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