Exports are playing a large role in dairy prices
Cheese prices continue gyrate up and down as they have for the past two months. More recently, cheese price has remained in a fairly narrow price range moving from the lower $1.80’s to the upper $1.80’s per pound. Buyers were trying to purchase cheese for the best possible price to fill orders. Unfortunately, cheese prices were not able to move below $1.80 for any length of time. Cheese needed to be purchased, and any minor dip in price resulted in aggressive bidding to fill orders. The window to fill orders for the holidays is just about closed as this needs to go through certain processes to become ready for gift boxes, displays, etc. This has caused buying to become more aggressive pushing prices above the narrow sideways pattern that dominated the market for the past two months. Although this is good for dairy farmers right now; it may not be good in the long haul. Block cheese price in the high $1.80’s impacts foreign demand as well as willingness of buyers to purchase extra cheese. Now that price has spiked up to $2.00 per pound, consumers may back away. This could result in stocks beginning to increase similar to dry whey and now nonfat dry milk.
USDA, in their Livestock, Dairy, and Poultry Report, reports that increased milk production is expected for the balance of this year and into 2008. This increase in production will likely pressure dairy prices. Domestic demand is unlikely to use up the increased production and exports have begun to decline, most likely due to high prices. Overall, world demand has been growing and is changing the face of dairy product marketing. The challenge we face is to meet the standards and qualifications of these foreign buyers. Butter producers are facing this dilemma. Most butter produced in the U.S. is salted and contains 80 percent fat, because this is the way we like it. However, foreign buyers prefer unsalted butter containing 82 percent fat. This is the main reason exports to Europe have not increased as much as anticipated.
Nonfat dry milk stocks have are beginning to increase in some locations. Demand continues to remains good, but has recently begun to slow a bit in Europe. World price for powder remains around $2.09 per pound relative to $2.05 per pound in the U.S. Cash Grade A nonfat dry milk price decreased on October 25th, showing the first price change that we have seen since June 1st. This decline reflects the current market situation and price weakness is expected to continue as the end of the year draws near.
Looking at Class III futures prices for the rest of this year and most of 2008 increases the hope for high prices to continue. After the price dip that took place when cheese prices fell at the end of September, contracts have come back to previous levels. Some analysts estimate that milk prices next year will remain high due to high feed prices, fuel prices, and less use of rBST. This has given many dairy producers the confidence to leave their milk price up to the market rather than protect some of the production. A higher cost of production keeps price protection just as critical as it was the past years. The mistake many will make is to stay out of the market next year due to the fact that they hedged this year and potential income was limited because the monthly announced prices were higher.
If patterns repeat themselves, this will be the critical year to protect prices as increased production will play a significant role in monthly prices. If cheese prices decrease after the holiday buying frenzy is complete, premium can be taken out of this market in a heart beat. All it takes is for traders’ perceptions to change. I recommend covering up to 50 percent of production for 2008 using forward contracts, futures, or a fence position. I would be better to hedge half of your production at $1.00 to $2.00 above your cost of production and have the market move higher than have one half of your production hedged and the market move below cost of production. Worse yet would be to see milk prices decline with no price protected. Marketing is protecting a price which meets your objective rather than trying to hit the top.
Upcoming reports to watch for are the October Agricultural Prices report on October 31st; the September Dairy Products Production report on November 2nd; and the Crop Production and World Supply and Demand report on November 9th.
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
