MONTHLY MILK & FEED MARKET UPDATE Provided By: Curtis Bosma - (312) 870-1185 - curtisb@highgroundtrading.com December 2014 A Sinking Ship? As the leaves began to fall, so did milk futures. Cheese sellers returned in November causing the spot cheese market to drop more than 21% for both cheddar blocks and barrels to $1.6825/lb and $1.6475/lb respectively. Spot NFDM was a similar story as prices fell from $1.2425/lb to $1.1150/lb during November. International SMP prices are still slightly discounted to the US NFDM market but the recent sell off in the US has tightened that gap. All of this bearish sentiment has taken its toll on first half 2015 Class III and IV milk futures as you can see in the forward curves. Dairy producers may be getting the feeling that they have missed the boat, but it is not too late. It is HighGround s belief that additional downside is on the way. November Announced Prices Class III: $21.94/cwt Cheese: $2.1305/lb Dry Whey: $0.6365/lb Class IV: $18.21/cwt Butter: $1.9891/lb NFDM: $1.3902/lb Class III Futures If you thought selling Class III at $18.00/cwt in 2015 was tough this market should make your jaw drop. The Class III forward curve was annihilated in November. 2015 contracts lost $0.20 to $1.39/cwt of their value. On a percentage basis this was largest monthly decline in Class III futures since Sept 2011. With cheese production on the rise and cold storage inventories approaching normal levels we could start to see the $15.00 handle disappear in the first half of the year. We have not found rock bottom yet, but the movement has begun. Upcoming Report Dates WASDE: Dec 10th Crop Production: Dec 10th Global Dairy Trade: Dec 16th Milk Production: Dec 19th Cold Storage: Dec 22nd Contract: Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 2015 Average Class III $ / CWT Change ($) Change (%) $ 17.77 $ (1.41) -7.12% $ 16.18 $ (1.39) -7.71% $ 15.67 $ (1.23) -6.96% $ 15.80 $ (0.89) -5.14% $ 15.94 $ (0.80) -4.67% $ 16.23 $ (0.50) -2.92% $ 16.47 $ (0.28) -1.63% $ 16.62 $ (0.28) -1.62% $ 16.90 $ (0.39) -2.26% $ 17.10 $ (0.29) -1.67% $ 17.10 $ (0.31) -1.80% $ 17.05 $ (0.27) -1.57% $ 16.98 $ (0.20) -1.16% $ 16.50 $ (0.57) -3.28% *** Changes shown are the changes in settlement prices Nov 7, 2014 - Dec 4, 2014*** $21.00 $20.50 $20.00 $19.50 $19.00 $18.50 $18.00 $17.50 $17.00 $16.50 $16.00 $15.50 Class III Forward Curve 9/2/14 10/6/14 11/7/14 12/3/2014 Source: CME 1
Class IV Futures Butter futures fell out of the sky in November as the front month contract fell nearly 22% on a monthly basis. This decline came shortly after the tumble made in the spot butter market in October. Spot butter held at around $1.9000/lb in November with very light volume. European butter is still being sold at a huge discount to US butter which will drive US prices lower as those markets converge. The NFDM market also moved lower as spot NFDM fell $0.1275/lb in November. US NFDM is still at about a $0.1000/lb premium to European SMP which means that more of a sell off could be on the horizon. The Class IV forward curve was washed out in November. First half 2015 lost $1.60 to $2.00 per cwt. On a monthly basis this was the largest decline since December 2008. Having said that, the game is not over for un-hedged dairy producers. The train has left the station, but it has likely not reached its final destination. Contract: Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 2015 Average Class IV $ / CWT Change ($) Change (%) $ 17.24 $ (0.28) -1.6% $ 15.93 $ (1.31) -7.6% $ 15.30 $ (1.60) -9.5% $ 15.08 $ (2.00) -11.7% $ 15.22 $ (1.92) -11.2% $ 15.29 $ (1.82) -10.6% $ 15.61 $ (1.62) -9.4% $ 15.95 $ (1.45) -8.3% $ 16.55 $ (0.65) -3.8% $ 16.70 $ (0.67) -3.9% $ 16.85 $ (0.05) -0.3% $ 16.86 $ 0.16 1.0% $ 16.85 $ 0.02 0.1% $ 16.02 $ (1.07) -6.3% *** Changes shown are the changes in settlement prices Nov 7, 2014 - Dec 4, 2014*** $20.00 $19.50 $19.00 $18.50 $18.00 $17.50 $17.00 $16.50 $16.00 $15.50 $15.00 $14.50 Class IV Forward Curve 9/2/14 10/6/14 11/7/14 12/4/14 Source: CME Milk Production The upward trend continues in U.S. milk production as year-over-year growth over the past four months has averaged +3.6%. After a strange 11,000 downward revision to August cow numbers last month, USDA did an about face and revised the September herd UP 9,000. The U.S. milking herd is now 77,000 (0.8%) above last year and is at its largest (9.280 million) since April 2009. It was also the third straight year October production has outpaced September (on a daily avg basis) which is impressive as 6 of the last 10 years have shown declines. Actual vs. last year vs. prev month** September Revision US Production* 17,095 3.8% 0.3% 22 23 State Production* 16,048 3.9% 0.2% 22 US Milk Cows* 9.280 23 State Milk Cows* 8.593 October 2014 US Milk Production UP 77,000 UP 89,000 UP 4,000 UP 3,000 UP 9,000 UP 4,000 US Milk Per Cow (lbs) 1,842 2.9% 0.3% 1 23 State Milk Per Cow (lbs) 1,868 2.8% 0.2% 1 *Quoted in millions **Adjusted to 30 day months Source: USDA-NASS -Excerpt from HighGround s October Milk Production Analysis 2
Cold Storage & Exports Commodity Million Pounds Metric Tonnes vs. Last Year vs. Prev Month September Revision* The days of sharply lower cheese and butter stocks in the United States is nearing conclusion. Though the numbers continue to lag behind the prior year, they are quickly catching up. And on a month-to-month basis, the drawdown between September and October was light, particularly for butter.butter inventories remain sharply behind the lofty numbers from 2013 but when looking at the seasonal rise and fall of stocks from this year, it looks surprisingly flat. From May to October 2014, butter stocks only declined by 54.5 million pounds (24,676MT) while that number in 2013 was 140.1 million (63,549MT) against a 10 year average of 89.4 million (40,552MT). It was the slowest decline since 2011. - Excerpt from HighGround s October Cold Storage Analysis September Revision as % of Actual Butter 138.2 62,680-24.0% -5.4% 0.0 0.00% Natural American Cheese Other-than-American Cheese** 612.2 277,687-2.2% -3.0% 0.0 0.00% 371.6 168,551-5.6% -2.9% 0.5 0.12% Total Cheese 983.8 446,238-3.5% -3.0% 0.5 0.12% Commodity Actual (metric tons) October 2014 US Cold Storage Data *Million Pounds Actual (million pounds) % of total US production **Includes Swiss vs last yr vs last mo** YTD vs last yr Cheddar Cheese 3,956 8.7 3.2% -24.1% -22.4% 30.6% Total Cheese 26,287 58.0 5.9% -2.9% -8.7% 23.2% Butter 1,550 3.4 2.3% -82.4% -34.0% -14.9% Nonfat Dry Milk/ Skim Milk Powder* October 2014 U.S. Dairy Export Volumes 38,709 85.3 49.2% -25.1% 16.7% 0.9% Whole Milk Powder* 1,822 4.0 59.0% -19.8% -24.8% 35.1% *Dry Whey* 18,712 41.3 59.3% -10.7% 8.7% -0.8% Whey Protein Concentrate < 80% 7,755 17.1 N/A -4.4% 10.3% -10.8% Whey Protein Concentrate 80% 2,740 6.0 N/A 36.4% -13.6% 29.4% Lactose 30,399 67.0 69.0% 23.1% 1.1% -4.2% Source: USDA-FAS *Unsweetened **Adjusted to 30 day months *Includes sweet whey, demineralized whey and whey permeate* Classroom Column Margin Requirements In order for a hedger to initiate a futures position with their commodity broker, one must deposit an initial margin requirement, or performance bond, into their account as cash collateral. U.S. dairy futures margin requirements are determined by the Chicago Mercantile Exchange and can change at any time. Additional funds may need to be deposited to meet margin calls. A margin call is when the account value falls below the initial margin requirement due to marked-to-market losses. Gains and losses are accounted for on a daily basis. Conversely, if futures move in favor of the hedged position, clients are able to withdraw excess funds above and beyond the initial margin-requirement. To learn more about these logistics, contact Curtis Bosma at curtisb@highgroundtrading.com. Current CME Milk Futures Margins Class III Milk: $750 to $1,500 per contract Class IV Milk: $1,000 to $2,000 per contract October export volumes continue to display the weakness that has been anticipated due to U.S. prices being uncompetitive to the rest of the world for some time now. NDM/SMP exports have trailed year ago levels for the past few months and are poised to fall behind on a year-to-date basis next month. Many of the powders have struggled as well and even the total cheese category, which has largely been on an upward track since early 2010, has fallen behind prior year levels and likely to stay there for at least the next handful of months. -Excerpt from HighGround s October US Export Analysis 3
Corn Futures Harvest is nearing completion so focus will shift to South American progression and weather. Demand is great and export sales continue to be strong. Ethanol production remains stronger than last year. Record setting weekly production number two weeks ago. Analysts have reduced South American production. Falling oil prices will pressure corn. World Agriculture Supply/Demand Report out December 10 th. Corn reserves expected to rise while crop rise may see another reduction. Soybean Meal Futures Export sales outpacing expectations. Chinese demand has been favorable. Basis levels remain historically high in some regions. South American meal priced much cheaper; saw some cancellations out of U.S. as buyers purchased from SA instead. Rumors that supplies will soon be tight. Transportation concerns still looming. Happy Holidays from $4.25 $4.15 $4.05 $3.95 $3.85 $3.75 $3.65 $3.55 $3.45 $3.35 $3.25 $400 $390 $380 $370 $360 $350 $340 $330 $320 $310 $300 Corn Forward Curve ($/bu) 2-Sep 6-Oct 7-Nov 4-Dec Source: CBOT SBM Forward Curve ($/ton) 2-Sep 6-Oct 7-Nov 4-Dec Source: CBOT 4
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Income Over Feed Cost CME Futures & HighGround s Forecast are showing that the national average for income over feed cost is about to receive a significant downgrade. The $8.00/cwt protection level in the Margin Protection Program (MPP) will likely send indemnities to farmers based in the first half of 2015. In order for the lowest level of protection in the MPP ($4.00/cwt) to send out indemnities the US All-Milk price must fall below approx. $13.50/cwt (assuming feed prices hold at current levels). REMINDER: The USDA has extended the application deadline for the MPP to December 19th. US Income Over Feed Cost ($/cwt) $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 IOFC Futures Max MPP Coverage Min MPP Coverage $2.00 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 HighGround Trading LLC ( HGT ) is an Introducing Broker (IB) registered under United States Laws. HGT is registered with the Commodity Futures Trading Commission and is a member of the National Futures Association. Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All information, communications, publications, and reports, including this specific material, used and distributed by HGT shall be construed as a solicitation for entering into a derivatives transaction. HGT does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. 6