Unkown markets
April 23, 2018

Lower Cow Numbers Not A Trend Yet

 |  By: Robin Schmahl

Milk futures have had a nice increase over the past month. Market strength can be attributed to increasing cheese prices, or can it? The fact is, block cheese price is only about 8 cents higher than it was a month ago with barrel price actually 2 cents below the price it was a month ago. Butter shows a greater difference with price 13 cents higher than a month ago. The strength we have seen in Class III futures is from the bullish attitude that has developed in the market. Cheese buyers continued to purchase cheese with the purpose of gaining ownership earlier rather than later. There is fear that continued farm liquidations and heavy culling would reduce cow numbers thereby tightening milk supply. This provided support in milk futures as traders felt confident higher prices would unfold as time moved forward.

 

A decrease of milk production and/or an increase in demand is required to increase milk prices. There is strong demand, but there is also strong milk production. However, continued low milk prices could eventually reduce cow numbers which would reduce milk production. The March Milk Production report released last week still showed strong milk production with an increase of 1.5 percent over March 2017, but it did show a decrease in cow numbers of 2,000 head from February. This may mean lower milk prices are beginning to have an impact. However, caution needs to be exercised and we much not yet come to the conclusion that this will continue resulting in the turning of the tide for milk prices.

 

It was not very long ago that cow numbers declined for two consecutive months while milk production continued to increase. In September 2017, cow numbers declined 1,000 head from the previous month while milk production increased 1.1 percent over the previous year. In October 2017, cow numbers declined 4,000 head from the previous month while milk production increased 1.2 percent. Cow numbers increased the next four months compared to the previous month until the recent March report. Thus, we must not conclude that cow numbers will continue to decline due to the decline reported for March. Higher potential milk prices could increase the potential for increasing cow numbers again.

 

The Margin Protection Program (MPP) is gaining greater attention and likely greater participation. The fact that premium for coverage at the $8.00 level for Tier 1 milk has been reduced to 0.142 cents rather than the previous 0.475 cents, raising the Tier 1 volume level from 4 million pounds of milk to 5 million pounds, payments will be calculated on a monthly basis rather than bi-monthly, and the fact that it is retroactive to January makes it a no-brainer to participate. February already resulted in a payment of $1.22 per cwt. The income over feed calculation for March will be released on April 27th with April income over feed being known on May 30th. Thus, we will know how much will be paid for the first four months of the year before the sign-up deadline of June 1. Estimates released by the University of Wisconsin suggest MPP payments may be rendered from February through August if the $8.00 level is chosen. Of course, these are estimates and we should not hang our hat on them, but it does suggest some much needed income may be generated from this program. It is not very often that sign-up can be made for a program already knowing some of the outcome. Those will LGM-Dairy can sign-up for MPP, but it will not kick in until the LGM-Dairy coverage is completed. MPP coverage will then begin from that date without retroactive payments.

 

Even with an improved MPP, producers need to utilize the futures and options markets to protect milk prices. MPP protects an income over feed cost. If both milk prices and feed prices decline, there could be no payments and lower milk checks. A combination of MPP and option strategies will provide good all-around coverage protection both income over feed and milk prices.

 

 

 

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 basic data from which they are drawn are believed to be reliable but cannot be guaranteed.  Any opinions expressed herein are subject to change without notice.  Hypothetical or simulated performance results have certain inherent limitations.  Simulated results do not represent actual trading.  Simulated trading programs are subject to the benefit of hindsight.  No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.  There is risk of loss in commodity trading may not be suitable for recipients of this publication. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.

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