The Worst is Behind Us, But. . .
Feb 12, 2010
By Robin Schmahl
USDA released a better outlook for milk production and a better outlook for milk prices on its latest “World Agricultural Supply and Demand Estimates” report.
As expected, it increased projected milk production 500 million pounds from January to a total of 188.9 billion pounds. The reason for the higher production forecast was due to increased production per cow and higher replacement heifers available. In fact, this is the highest number of dairy replacements since 1986. Cow numbers are not expected to decline as earlier anticipated.
The projected all-milk price was raised 5¢ for 2010 to an average of $16.55/cwt. Although this is not as high as we would like it to be, it is an increase of $3.74 over the 2009 average.
I believe we can say the worst is behind us, but it will take longer than earlier anticipated to see significantly higher prices. The Class III average is projected to be $15.25/cwt., an increase of $3.99 over last year with Class IV averaging $14.35/cwt., an increase of $3.46.
It will be interesting to see how much impact the large heifer inventory will have on the market this year. Milk production per cow was higher than the previous year in nearly all months in 2009. Cow numbers decreased substantially, but overall milk production did not fall as much as was expected.
Culling was heavier, but replacements brought new blood and higher production per cow to the herds. There will be a lot of heifers coming into the herds the first half of this year. If the rate of culling slows, milk production could move higher than a year ago more quickly than predicted. If this happens, it will be up to demand to keep prices higher.
Weaker milk futures prices, following a positive end to 2009, have many producers questioning their future of being a dairy farmer. All of the work and all of the risk is not being rewarded with profitability. Milk prices have been too low for too long and is taking its toll.
I firmly believe milk prices would not have been this low had it not been for the economic meltdown in late 2008 and 2009. There is no question that the economy has had an impact on demand. Prior to the recession, commercial disappearance of dairy products steadily increased. Milk production was increasing and milk prices were reaching record levels.
Few had serious thoughts of exiting the dairy business and many of those who did, took advantage of the CWT herd retirement program. Now, with the CWT program being questioned as to its effectiveness, other ideas are being sought. Many ideas have been proposed as to how to boost milk prices so farmers can be profitable.
What I find interesting is that we already have the futures and options market in place for the purpose of protecting milk prices. Many continue to have an aversion to using it either because they do not understand it, do not have the money to hold a position, tried it a few times and feel they lost money, or feel that it is better to take the highs with the lows and it will balance out.
This last statement is truly false. The average Class III milk price over the past 14 years is $13.20/cwt. Not a great price and certainly one that could have been exceeded easily by consistently marketing. The problem is the lows have a great impact on cash flow that can last two to three years before getting back on track to build equity.
As far as money is concerned, many lenders are recommending or even requiring farmers to do marketing before an operating loan will be given. Most lenders are willing to set up a margin account for marketing as they know the money will come back either with a higher milk price or a higher milk check. We need to realize times have changed and farming has changed.
The futures and options market was established for a reason, and that is to provide a tool for protecting a price. The CWT program has a similar goal, and that is to reduce milk production to increase income. There is a cost to this. The recent LGM-Dairy insurance program provides a means to protect profitability with a policy that protects income over feed costs.
So, whatever tool you want to use or implemented in the future, there will be a cost associated with it. It is up to you to decide which one you want to do. Like it or not, risk management has become a necessity.
The recent jump in Class III futures based on short-covering and a knee-jerk reaction allowed some of the recommended fence positions to be established. Put options can also be established if desired. Either way a floor needs to be implemented with the ability to take a higher price if it develops.
Upcoming reports to watch:
- Livestock, Dairy, and Poultry report on Feb. 18
- March Advanced Class I price on Feb. 19
- January milk production on Feb. 19 (which will include annual revisions)
- January cold storage on Feb. 22
- Livestock slaughter on Feb. 26
- Agricultural prices report on Feb. 26
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