A More Bullish Attitude Emerges for World Dairy Demand
May 03, 2010
By Robin Schmahl, AgDairy
Class III milk futures in May, June, July and August contracts have exhibited strengthening prices since mid-April. This stands to reason as anticipation grows for stronger dairy prices.
World prices are being watched very closely. Continued strength in the butter price has resulted in traders liquidating previous sold positions (shorts) to reduce their exposure. This results in steadily improving futures prices and adds extra price premium in the market. That is, extra price premium relative to the current Class III price calculation using the Federal Order formula. The updated weekly NASS prices for nonfat dry milk and whey, and the closing CME Group spot prices last week for cheese and butter, equate to a Class III price of $13.08.
May Class III futures have run out of steam with half of the contract already priced. Futures will begin to flat-line and trade within a tight range for the month. This has already begun the process of converging with the underlying cash markets by decreasing slightly over the past few days. Most of the adjustment in price for this contract will result from weekly NASS prices and very little from daily cash trading.
June, July, and August futures contracts are anticipating continued higher cash prices as traders watch global markets very closely. Later-month contracts have not been as exciting, with much of the price movement confined to a virtually sideways range. However, prices are returning to the top end of the range as the attitude become more bullish.
Overall demand from the world dairy market is solid. Some improvement in world economies brought consumers back to the market.
The demand leader is powder. China has been importing large volumes of Whole Milk Powder (WMP) and Skim Milk Powder (SMP) over the past year. This is due to a combination of heavier culling of their dairy herd due to the melamine scandal. It is estimated that about 20% of their herd was culled due to the loss of confidence by their consumers in the domestic milk supply.
Now, lest we get too excited over this, much of their imports have come from New Zealand. In fact, U.S. exports to China are primarily whey protein concentrate, sweet whey and lactose. In 2009, exports of whey protein concentrate totaled 47,239 metric tons (MT), sweet whey 46,313 MT and lactose 49,795 MT. Skim milk powder exports to China were only about 6,000 MT, with cheese exports about 2,000 MT. Yes, every little bit helps and there is a lot of room for growth.
The proverbial wrench in the works had been the recent announcement by China that they were going to ban U.S. food-grade dairy imports by May 1. They had changed their stance on a previous health certificate agreement made in 2007. This certainly was not good news last week, but it did not have any noticeable affect on cash or futures trading. On Friday, however, they granted a 30-day extension giving both governments until June 1 to work out a new health certificate agreement.
We have moved to a global marketplace and need to cater to the demands of consumers or lose market share. This can be a hard pill to swallow, but one that is going to shape our business going forward.
There certainly seems to be light at the end of the tunnel. An improving global economy and improving world dairy prices will do wonders for domestic milk prices, but it may take some time for higher prices to materialize.
Fall contracts already have a $2.00 price premium factored in. Increasing milk production, along with increasing cheese stocks, may be a limiting factor until some inventory clears, which may take the rest of this year.
Upcoming dairy reports:
- Fonterra Auction on May 4
- California Class I price on May 10
- World Agricultural Supply and Demand report on May 11
- Monthly Milk Production report on May 18.
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.