By Robin Schmahl
There may be some indications that six months of low milk price is having an impact on the oversupply of the market. Three of the past six months were in the $10.00 range, and three months were in the $9.00 range.
During that time production remained relatively strong posting year-over-year increases. However, the 5-year streak of higher production has come to an end. The June Milk Production report showed a decrease of 0.1 percent for the top 23 states and a decrease of 0.2%for the U.S. Although this does not seem like much, it was the first decline since mid-2004.
Surprisingly, the June decrease in production was less than expected. June was when most of the 101,040 cows were eliminated under the seventh CWT herd retirement. This did not have an impact on milk prices for June, but it did have an impact on cow numbers. The dairy herd in the country decreased 34,000 head from the previous month while losing 86,000 head from a year earlier. One would have thought milk production would have shown a greater decrease. However, production per cow increased 13 lb./head from a year ago.
From what I am hearing in the country the next production report will likely see a large drop in production. Many farmers have cut back dramatically on cow numbers, types of feed they purchase, and have even been selling some replacement heifers to try and keep afloat. The recent jump of cheese prices, back above support, has provided some hope that higher prices may be coming in the near future. The amount of cheese in inventory is concerning, at highest amount since 1984, and indicates that price will have a difficult time increasing significantly until this inventory is reduced.
Another round of the CWT herd retirement program was implemented July 10, with bids being accepted through July 24. No indication was given as to the expected amount of cows to be eliminated, but a cap of $5.25/cwt. was put on bids. I am assuming any bid meeting that criteria will be accepted unless the available money is used up.
Summer weather has resulted in lower component values and decreased cheese yield. This should slow the amount of cheese production and volume moving to storage. Typically, inventory should decrease in July and continue to do so through the end of the year. If stocks continue to increase into or through the third quarter, then the hand writing is on the wall and we will not see much price strength through the end of the year.
Class III futures contracts in 2010 have rallied notably over the past two weeks which is getting me to sit up and take notice. Earlier, I had recommended that fence positions should be established if contracts in 2010 were to rally a dollar. That time has come.
I know it is difficult to step in and potentially limit upside price potential, but the goal is to achieve a level above the cost of production and begin this on some percentage of your production. A fence positions consists of the purchase of a put and the sale of a call which establishes a floor and a ceiling. This should be done at a $2.00 spread. If the milk price were to rally you may limit your upside to between $16 and $17 for a Class III price with premiums on top of that depending on where you are and your component values. I know there is a good possibility of some upside price potential, but the goal is to manage risk and risk is to the downside if you are producing milk. A follow-up strategy can be implemented after these are established if and when they need to be to.
Upcoming reports to watch for are the June Cold Storage report on July 22; the June Livestock Slaughter report on July 23; Commercial disappearance on July 28; July federal order class price on July 31; the July Agricultural Prices report on July 31; and the California 4a and 4b prices on August 3.
--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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