USDA Is Not Very Optimistic
Sep 14, 2009
By Robin Schmahl
Eight months of 2009 are already behind us, and so far profitability has been non-existent due to low milk prices. The Class III price has fluctuated from the low of $9.31/cwt. in February to the high of $11.20 in August with an average price of $10.29/cwt.
The all-milk price has ranged from $11.80 to $13.30. Anticipation for higher prices can be seen in Class III futures as each subsequent month is higher. Futures prices are certainly nothing to get overly exited about, but it is providing some hope that the worst may be behind us.
This year has again been a real lesson for how important marketing has become. Those who took advantage of significantly higher futures prices last year by hedging some of their production have been able to weather the storm well. The opportunities were there, but it is always difficult to pull the trigger. This decision was compounded due to the inability of many to secure feed contracts in order to lock in profitability, which brings us to another point. When feed contracts cannot be obtained or prices are exorbitant, you can turn to the options market to protect feed costs from increasing while leaving the bottom side open to take advantage of a lower price if prices fall.
I have been indicating that the time was near to hedge feed prices for next year and the time is now. A corn price near $3/bu. for the front-month contract is providing the opportunity to forward contract through a feed supplier, purchase call options, or purchase call option spreads for next year. Soybean meal falling to $275/ton on the futures market should trigger call option buying. I know there still remains a wide basis for meal, but the purchase of call options now to protect price and then contracting when basis come back to normal is a strategy that needs to be implemented.
Feed prices need to be protected in light of the latest USDA estimates for 2010 milk prices. Their latest estimate left the average Class III price for next year unchanged at the range of $13.75-$14.75, Class IV price was lowered 15¢ to $11.95-$13.05 putting the estimated all-milk price at $14.55-$15.55, a decrease of 10¢/cwt. Of course, this will be better than the $12.15 average price expected for this year, but far short of what is needed to make up for lost income this year. The USDA also sees an increase of 200 million pounds to 186.7 billion lb. of milk production next year. The last thing we want to see is milk prices improving somewhat only to be offset by rising feed prices. Larger crops are expected than earlier this year, but corn carryout for this year is now expected to be 60 million bushels lower than the marketing year just ended. Soybean production has increased with a record crop expected to come in, but demand has been brisk which could limit a build-up in stocks. Be on guard as things can change quickly.
There is some thought cheese prices may increase into the end of this month as they may be some desire for cheese buyers to improve the value of their inventory. There is also the possibility that the USDA could increase the support price of cheese to $1.40 for blocks and $1.38 for barrels versus the $1.31 and $1.28 respectively. An increase in Class III futures for 2010 contracts of 50-75 ¢ needs to be taken advantage of to implement an option fence strategy buying a put and selling a call $2 apart.
Upcoming reports to watch for are the August Monthly Milk Production report on September 18, the Advanced October Class I milk price, the August Cold Storage report on September 22, the August Livestock Slaughter report on September 25, and the Agricultural Prices report on September 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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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