Record corn and soybean crops will not mean a break for dairy feed prices. The USDA updated 2010 crop estimates, forecasting a record-high soybean crop of nearly 3.5 billion bushels and, even though the corn harvest forecast was lowered somewhat, it is still expected to be a record-high 13.2 billion bushels.

But the dairy feed price picture was clouded despite those record crops, by a separate supply and demand report, according to Dairy Profit Weekly Editor Dave Natzke in Friday’s “DairyLine.”

“The agency raised expectations for soybean exports, especially to China,” Natzke reported, “putting a dent in expected season-ending inventories. And, USDA raised corn use projections for both ethanol and exports, reducing corn stocks to the lowest level in seven years, and inventories as a percent of annual use to the lowest level since 1996.”

As a result, USDA projects season-average soybean prices at $9.15-$10.65 per bushel, up 65 cents from previous forecasts, with projected soybean meal prices raised $20 per ton, to a season average of $270-$310.

USDA now projects the season-average corn price to be between $4-$4.80 per bushel, up by 50-70 cents from previous forecasts. The corn futures market is also moving higher, and as of mid-week, 2011 corn contracts were averaging nearly $5 a bushel, Natzke reported.

That points to another factor, according to Natzke. Kurzawski noted in Wednesday’s report, higher commodity prices are attracting more market speculators. Renewable Fuels Assoc. (RFA) Vice President of Research Geoff Cooper said speculators now control almost as much corn as the entire ethanol industry used in all of 2009.

The bottom line, Natzke concluded: “Even though milk prices are expected to improve, higher feed prices will take a bigger bite out of dairy farmer income.”

Switching to the price front, the October Federal order Class I base price was announced Friday morning at $16.58 per cwt., up $1.08 from September and $4.23 above a year ago. That put the 2010 average at $15, up from $11.09 a year ago, comparing to $18.32 in 2008.

The NASS butter price averaged $2.1198 per pound, up 29.3 cents from September. Nonfat dry milk averaged $1.1351, down 1.9 cents. Cheese averaged $1.6747, up 7.4 cents, and dry whey averaged 36.07 cents, up fractionally.

California’s October Class I price is $18.44 per cwt. for the North and $18.71 for the South, up $1.29 and $1.28 respectively from September and $4.69 above October 2009.

Dairy market could edge up
There weren’t many changes in the cash dairy markets the week of Sept. 13, as they awaited Friday afternoon’s August Milk Production report, which I will detail next week.

The block cheese price held all week at $1.735 per pound. That’s 40.5 cents above that week a year ago. Barrel closed at $1.71, up a half-cent on the week, and 42 cents above a year ago. Eight cars of block traded hands on the week and three of barrel. The NASS-surveyed U.S. average block price hit $1.6683, up 2.7 cents, and barrel averaged $1.6906, up 3.9 cents.

Butter was also unchanged on the week, holding at $2.2225, up 95.25 cents above a year ago. Only two cars were sold all week. NASS butter averaged $2.1317, up 3 cents. NASS nonfat dry milk averaged $1.1195, down 2.7 cents, and dry whey averaged 36.02 cents, down 0.2 cent.

Market analyst Mary Ledman, principal of Keough Ledman and Associates, Inc. in Libertyville, Ill., said in last Tuesday’s “DairyLine” she didn’t believe the markets had topped out and that we might see some “incremental gains,” but no major 1-, 2- or 3-cent jumps. She sees things holding through the end of September, but warned; “October could bring with it a different story.”

Ledman expects August milk production to be similar to July output. Cow numbers will continue to strengthen, she said, though not likely repeat the 20,000 head increase of July over June.

She pointed out that cull and slaughter rates have fallen in the last month, so she expects cow numbers to expand, though milk per cow will likely decrease from July in the Midwest and Northeast. She warned that output will likely be strong in the West where weather has been favorable.

Demand is the other big factor. Ledman said it’s still “sluggish domestically, but internationally, has pulled us up.” She added the caveat that we’re approaching Oceania’s peak milk production season.

U.S. dairy exports were strong through July but she expects a slowdown in third and into the fourth quarter as Oceania’s milk production increases and adds more production to the global supply.

Speculators in the dairy markets are bullish, according to Downes-O’Neill dairy broker Dave Kurzawski. Speaking in last Wednesday’s “DairyLine,” Kurzawski referenced a recent Commitment of Traders report from the U.S. Commodities Futures Trading Commission and said “higher prices could lie ahead.”

The weekly report details the makeup of traders in any given market – dairy included, Kurzawski explained – and “is one of the more underutilized reports to dairy traders, but it certainly does key us into what various traders are doing.”

The higher prices Kurzawski is referring to are the Class III futures. “If you look at the Commitment of Traders report, there’s interest by large speculators to be long in Class III futures or options, meaning that they think there’s going to be more upside potential to price,” he said.

He warned that this doesn’t mean they’re right, but it does mean “the people who have no real physical skin in the game except to trade the price, are bullish.”

He added that the report points out this is the first time speculators have been bullish on Class III milk since August 2008 and called it “an interesting dynamic to look at in terms of the makeup of the market” and it “means that the people that are in the market solely for profit want to own milk.”

What does this mean for producer hedging? Kurzawski said, “It will probably open up a lot of opportunity to buy put options or even sell futures at some point in time.”

He doesn’t recommend selling futures at this level right now, going into 2011, but suggests looking at put option opportunities going into next year. For more details, call Dave at 800-231-3089.

(Refer to the newspaper for the remaining portion.)