by Robin Schmahl
After falling steadily for nearly a month, Class III futures finally reached bottom and have rebounded nicely. The end of 2009 renewed a bearish attitude in the market but has since given way to a more positive outlook. Strengthening cash markets caused the turn-around as traders felt a bottom has been set
After a nearly record wide block/barrel spread in December, the spread corrected quickly and has now inverted with barrel price higher than blocks. This has become more common over the past few years with the market more comfortable with these swings. In the past, the block/barrel spread remained fairly close with few aberrations. However, this spread is more responsive and is a representation of current fundamentals. There does not seem to be as much of an effort to maintain the normal spread of 3¢ to 4¢ between the block and barrel price.
Buying interest in butter has increased over the past week with buyers becoming more aggressive. Churning activity increased over the holidays but has since slowed due to less available cream. Demand is being met with excess moving to storage for later use. Unlike cheese which will age, butter can be frozen and later brought out to meet demand retaining the same consistency.
There is an underlying fear that milk supply will tighten significantly during the year and buyers are willing to build inventory at this price. Spot price and futures have responded to this aggressive buying by increasing 18¢ last week reaching the highest price since Dec. 1. Export interest has been increasing with November butterfat exports totaling 13.7 million pounds, an increase of 59% over a year ago. Butterfat exports have been trending higher over the past four months after spending nearly a year in the doldrums. Even though overall butter exports for the period on January-November 2009 were down 72% from a year earlier, the future is looking brighter. Some manufacturers have increased churning of 82% butter for the export market in anticipation of further demand.
Many times butter is the indicator of the price direction and strength of cheese. If this holds true, higher cheese prices may follow soon. However, cheese inventory is large and has reached the time of year during which there is a seasonal increase of stocks. Unless demand picks up dramatically or production fall significantly, these high supplies will have an impact on price strength. November cheese exports increased 13% with whey protein exports up 47%, indicating improving demand.
The latest World Agricultural Supply and Demand report caught many traders off guard but was a welcomed report for feed buyers. USDA reported record corn and soybean production in 2009 despite weather challenges during the year. Corn production totaled 13.151 billion bushels with a soybean production of 3.361 billion bushels. This report generated a lot of questions that will remain until the USDA updates these numbers on the March 10 report after more time has elapsed and harvest is (hopefully) complete. Since the report, corn price has fallen around 50¢ per bushel, soybeans fell 36¢, and soybean meal has fallen about $5.00/ton. The retracement in prices that I have been expecting is now taking place and will give opportunity to hedge feed prices for the year.
Upcoming reports to watch for are:
- the December Milk Production report on Jan. 19
- the December Livestock Slaughter report on Jan. 22
- the February Class I price on Jan. 22
- the December Cold Storage report on Jan. 22
- Commercial disappearance on Jan. 26
- the bi-annual Cattle Inventory report on Jan. 29
- the January Agricultural Prices report on Jan. 29
- the California 4a/4b prices on Feb. 1
- 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.