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Milk production trend to be lower through fall

Agriculture.com Staff 07/19/2006 @ 2:08pm

Total milk production reached a record high in May of 16.07 billion pounds. The seasonal peak is in place for production and trend should now be lower into this fall perhaps later. Milk Technical

A rate of change study shows that this year's spring flush trend was with difficulty compared to last year. Our research suggests higher probability for a decline in production for 2006-2008 than during 2002 to 2006.

Northeast U.S. weather has not been helpful for the production of quality crops and this may impact future winter production of milk for those states. In addition it has been hot in the south which should reduce production by normal to above normal amount. And drought in the west (plains) offers increased demand of feed inputs in that pasture and crop conditions are in decline.

Demand for milk and products, has been stronger than prices reflect. Cold storage numbers show an industry that has not stored cheese and butter by the amount reflected by milk production numbers. So the trade moves product more than stores product which pressures price and the buyer is no saint. And so when the supply side declines the seller will not remain a charity.

Milk futures achieved a long-term oversold condition during March-April of this year. Trend has been up since then but currently is within a correction phase. Support for SEP milk futures is $12.15-.00 and trade over $12.40 should be a sign that the correction is over.

Our Fusion (fundamental plus technical) and CSA (price cycle) long term models called for the Business cycle in terms of price to bottom for dairy in March. US cash and CME prices bottomed in March, so another correct call as for long term trend. Milk futures and the milk check bottomed later than forecast but within model parameter. There are two long-term forecasts for milk and cheese. The most preferred of the forecasts calls for higher prices into next year with potential for C3 to trade over $18.70 /cwt.

For intermediate and short term model trends the forecast calls for a bottom soon and with a result as an up trend into August perhaps September and with potential to put SEP futures to $13.40. Looking at current production it may take a bit of a weather scare as additional input to put price that high but with consideration of today's sorrowful state of US climate we will not bet against such an occurrence.

Our research suggests over an 80% probability for a drought 2006-2008. And in turn this should create a bull market for corn that can take price to a target of $6.80 although a minimum in the $4.00s will suit us just fine.

In December of 2005, I spoke at the Traders Expo in Las Vegas about the potential for a major agricultural bull market this decade and one that would relate to a major impact from weather. The majority of the discussion was related to wheat. At that time Kansas spot wheat futures were $3.75 and today spot futures were at $5.18. (And probably on their way to $5.90.) I mentioned that traders and risk managers using systems should look at data from the 1970s and the 1930s. And this year there has been drought as severe as during the 1930s (southern plains), a dust storm in AZ (1930s Dust Bowl) and now the drought zone has grown from TX all the way to the Canadian border.

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