Potential Tighter Milk Supply Propels Prices Higher

Published on: 12:12PM Apr 15, 2013

Buyers have been stepping up aggressively to get their hands on cheese, butter and nonfat dry milk.

Market-moving information has been in abundance recently. Both domestic and international news has been plentiful as far as dairy is concerned. This information has turned market participants more bullish. Cash prices have been moving somewhat contra-seasonal and have increased more than had been anticipated early in the year.

The potential impact on dairy product supply stemming from the drought in New Zealand has had the greatest underlying support. A significant decline of milk production from dried up pastures prompted many to dry off cows early. Others are using supplemental feed, which is increasing costs. March production is estimated to be nearly 30% below last year. There is time before the majority of the cows will freshen, and for rain to replenish soil moisture and promote pasture growth. However, it does not look to promising at present. There are some forecast models showing rain events in the next few weeks, but it is still too early to tell.

Cheese and butter buyers have been stepping up aggressively to get their hands on available supply. Prices have been increasing as sellers have been reluctant to offer product. Inventory is being held with confidence, waiting for higher prices as well as retaining supply for later in the year.

Nonfat dry milk (NDM) has been the leader of the cash complex. Buyers have been falling over themselves attempting to obtain product despite current fundamentals. Prices were anticipated to increase, but many are surprised at the speed in which it has happened. Grade A nonfat dry milk price jumped over 28 cents in the past month. This volatility is not unusual in this market, with early 2011 recording a very similar rise in price over a three-week period.

Production schedules are increasing now that spring flush is underway. Supply seems sufficient with resellers offering loads but at the high end of the price range. NDM production in February totaled 62,369 metric tons, down 20% from last year. Cumulative production is down 14.0% for the first two months of the year versus last year. Lower production in the face of supply concern from Oceania has lit a fire under the market.

USDA did not make a large change in milk production or dairy prices on the latest World Agricultural Supply and Demand Estimates report. Projected milk production was reduced 100 million pounds from March, totaling 201.8 billion lbs. If realized, milk production would be 1.5 billion pounds more than 2012.

Milk and product prices were increased with the current estimate for the All-Milk price projected to average $19.70, up $1.19 from 2012. This certainly is good news. However, the concern over higher feed prices is alive and well. USDA did not increase grain ending stocks as much as most had anticipated. This puts us in a serious situation if weather is not ideal this growing season. The nation is already experiencing less than ideal weather. Soil is too cold and too dry in some areas. Other areas of the country continue to experience snow and rain with below normal temperatures keeping farmer out of the fields

USDA will reinstate the monthly milk production reports after there was significant outcry from industry personnel. The report will be a bit different as the surveys of production will be using government agencies, cooperatives and other organizations rather than the surveys it had done. This may not be as accurate but certainly will be welcomed by the industry.

My hedging recommendations are similar to my last article. Hedge feed prices now before prices regain what was lost since the Quarterly Stocks report. Corn has already regained 20 cents with soybeans up 30 cents from the lows. Use call options and call option spreads that will protect against higher prices while at the same time allow for lower prices if ideal weather is experienced and lower prices unfold.

Upcoming reports:

- Global Dairy Trade auction on April 16
- March Milk Production report on April 19
- March Cold Storage report on April 22
- Livestock Slaughter report on April 25

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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