Focus on Demand Instead of Supply

September 24, 2013 — Some dairy analysts expected a bigger drawdown in butter from the latest Cold Storage Report, released by USDA Monday. But a 9 percent drawdown is “still pretty sharp,”FCstone according to FC Stone risk management advisor Ron O’Brien.

Butter stocks totaled 268.5 million pounds in August, still 34 percent above a year ago. Butter stocks ballooned to over 300 million pounds this spring, the first time since June of 2003. That’s what pressured the butter market lows to $1.36 this year.

We’ve been rallying since the middle of August. O’Brien reminded us that butter prices were only around $1.10 in June of 2003 when stocks were over 300 million pounds, but then rallied to $2.3725 the following spring.

“Markets can rally despite heavy stocks and we really have to turn our attention to demand,” he said.

The first seven months of this year we have exported 15.1 percent of our total milk solids. January-July exports of butter are up almost 30 percent from a year ago. “Demand is the big variable moving forward,” he said, adding an uptick in butter prices could bring record setting Class IV prices.

The latest milk production report showed an increase of 2.7 percent in the major dairy states, including Arizona, up five percent. California was up 2.7 percent after over a year of declines.

“Money makes milk,” O’Brien said. “They’re doing a better job with milk per cow. They’re starting to see their margins come back and are taking advantage of it.”

A higher U.S. dollar and depressed grain prices has producers keeping an eye on input costs. O’Brien sees input costs down sharply from last year.

“I think that is why you are seeing a depressed forward curve with the Class IV futures next year averaging $17.30 and Class III prices averaging $16.82,” he said. “When we currently price Class IV at $20 and Class III at $18 you see that discount on the horizon.”

It’s likely to be extremely volatile, according to O’Brien. The dairy market is currently separate from its relationship to the grain market. “There’s a worldwide demand for the products and that’s going to keep markets well supported short-term, medium-term, and long term.”

Protecting your bottom line is all about drawing a line in the sand on both revenue and input costs. “That clarity will not only help you operate but help you sleep at night,” he said. “Take a real conservative approach, but expect some pretty decent margins going forward.”

“If you lock in a margin on the grain side…. and you’re able to lock in a secure revenue, you never go broke taking a profit,” O’Brien concluded.

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