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Veteran Advisor

From the parlor pit 12-22

Dairy farming has never been easy. Oh new technology can make one more productive but it doesn't usually lighten the work. On most farms today there is still a lot of manual labor that needs to be done in all kinds of weather.   The new, well maybe not that new,  wrinkle has come in the form of price volatility. Milk markets in the past were very stable. Processors didn't like to see wild swings in market price as that could be easily seen by the consumer.  There was an equal advantage for both producer and processor to have a steady symbiotic relationship. neither one like the other but neither one wanted a replacement either.

Then came 2008 Exports surged and farmers were able to market milk through their co-ops to overseas markets at much higher rates than what the local processor was paying. The local processor was able to keep up because of the American consumers ability to pay more.  Well for a few months the dairy man was doing real well. Dairy farmers were able to ride the waves of higher prices which we foolishly believed were going to last forever. The waves crashed on the hard reality of higher feed costs in mid 2008, and while milk was still historically high so were all the other costs.  A dollar didn't buy what it used to and the supply of dollars to the dairy farmer was shrinking. 

A ferocious storm rolled over the dairy industry that wasn't ever anticipated and no amount of preparation would keep anybody safe from these horrible times.  

 

      Fast forward to today. The industry as a whole has struggled to change.  Feed stuffs have been looked at in whole new lights.  Volatility has become something we have grown accustomed to while not being comfortable with. Budgeting has been razor thin and made into an art. Stress management has taken on a whole new meaning and unfortunately some have not learned to handle it.  The statistics of how many farms have been lost are grim  and do not need repeating at this time. But we have survived and we are not stronger but we are still resilient.

 

      The past few weeks have proved that volatility is here to stay. 20 cents off the block cheese market in just two weeks, over 60 cents off the butter price in a matter of months.  These have sent shock waves thru the CME and caused class 3 milk futures take another sharp dip.  Where do we go from here? 

 

         Well there is always hope.  Fortunately blocks have held above the low for the year which we reached back in March.   Butter has regained about a nickle off the lows and seems headed higher. exports are taking off again and there is drought in NZ which may cut production by 15 % for the second half of their milk season. 

     Feed costs will remain high. Don't blame ethanol as it was already in the mix.  Hay will be higher priced for sure next year. SW guys seem to be facing a very tough weather year.  

     Cow slaughter is a brite spot as we are culling at a record pace and the market is absorbing those cows at a higher price.  Seasonally we are about 10 cents over the historic levels on cull cow prices.  Whats ahead?  Well I think Dickens said it best "it was the worst of times and the best of times."    Going forward we will see changes that while scary may be very necessary. 

 

I still feel that the first quarter will be tough. there is much news of a supply problem coming Here is an excerpt from agrimoney

The rally in global dairy markets may be set to restart in earnest in 2011 as New Zealand's drought cuts world supplies at a time of "extremely high" import demand, Rabobank has said.

Dairy prices, which have seen changes of 0-7% in the current quarter, possess "considerable upside potential" in the next period as New Zealand grapples with dryness which could, unless rains are forthcoming, see production slump by 15% in the second half of 2010-11.

The "drought-driven contraction" in output in the world's top dairy trading nation will more than offset an improved performance in the northern hemisphere, prompting the first cut in world exportable supplies in two years.

 

But at home our processors are still reeling from the overpriced inventory they had when prices fell out of bed in 2009.  

Prices of butter have already topped those of the 2007-08 spike, when prices of dairy joined those of other food commodities in enjoying strong gains, before suffering as the credit crunch and global recession struck.

Indeed, prices of many dairy products have roughly doubled, halved and then doubled again over the past four years.

They will be slow to  respond to these market conditions. When they do it will be a rocket ship ride to the moon.  Every body is wary of the first half of 2011, This opening line from an article on today's home page of Agriculture.com sums it up well with the opening sentence.

Dairy producers face a cost-price squeeze for the first half of 2011, University of Missouri dairy economists say in a university report.

 There is a lot of hope on the horizon I believe as stated in the agrimoney article I cited before.

Russia's reliance on imports has been augmented by the impact of parched summer conditions on domestic production, prompting a quest for "product to supplement drought-depleted local supplies".

China, meanwhile, is seeing dairy consumption increase along with consumer wealth and the spread of modern supermarket chains, with refrigerated supply chains.

"Chinese purchasing will be buttressed by market growth, milk supply shortfalls and the high costs of sourcing product locally," Rabobank said.

Whats it all mean? Control what you can.  Leave the rest to God. Later this week a Christmas story from me. The markets are sure to slow down in terms of volume of trades which could mean more erratic behavior. So keep one eye closed!  You'll need to stay aware but not immersed. BE Safe, JR