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Rich Posson: A milk crime mystery novel in the making

The near 24% decline in milk futures this year is the crime of the decade in my opinion. Producers have a right to complain. Milk is extremely under valued according to my studies. Milk dragged its feet during the commodity bull run this year with not keeping up with relative price performance, inflation and higher production cost. And then as insult milk futures declined with seasonal decline of some commodities but as a leader in some instances. Interesting that milk decided to follow seasonal trends of other commodities rather than its own.

Action as such as this forces my research opinion that more than ever 2009 should be the day of reckoning. Although I have lowered the target range by one dollar to $24 C3 cash milk I still allow the upper range of $30.

The CSA models suggest the milk market changed its mind about an earlier year 3yr business cycle (long term) bottom and has now used the second opportunity (time for) bottom which suggests the decline should be over. The forecast is now bullish into late 2009 perhaps into early 2010. This month I have been recommending consumers should buy for 2009 and for remainder of 2008. For producers who are forward sold I have recommended a speculative defense strategy in order to reduce risk of selling too cheap. I think investors should consider milk has more opportunities for high return for 2009 than other commodities. Even with this decline it looks as though my recommendation made late last year to buy 2008 milk will be correct (profitable but not as well as forecast) for each and every month.

A technical perspective reinforces the model opinion with long term over sold indicators suggesting under valuation. And some indicators have turned or working toward turning the long side –bullish. Spot milk futures retraced to between Fibonacci 50% and 61.8% retracement, which I think is reason enough to seek value.

I believe the dairy industry has incorrectly dialed in negative economic news over positive economic news and with over reaction to price. Traders ought to pay less attention to the economic and financial publications and more to farm side and commodity publications. Food demand at the consumer level has been better than many have assumed.

On 9/4/08 I emailed ALERT subscribers that I felt milk had placed intermediate and long term trend bottoms.

Economy

A cumulative study of the Manufacture index (economic indicator ISM) with trend following study suggests the economic trend is still up for this decade. Some restaurant chains have reported good to excellent earnings and growth. At my household we still buy the same amount of dairy products. I still believe (for now) the negative economic factors of the macro economy are more for the paper world than the material world –commodities. Global demand for commodities is still good. We do not need a good stock market to have a good economy. Some from that sector are working hard to make the case other wise.

Grains

For now models suggest corn, soybeans and soymeal can make new record highs in 2009 as easily as trade a return to near current highs. Models suggest long term bottom for soymeal and soybeans to be placed this month and major intermediate to a long term bottom for corn as in place in August or by October. I believe the corn and soybean crops are smaller than most think. I have heard of 14 ton corn silage production in Iowa when 20 to 25 tons is normal. I think there is high risk of weather problems next year. I will have many more details in the annual report to published in a few months. I view the grains as under valued. And corn near $5 is grossly under valued. I think corn is worth $7.

Energies

Before the July decline for energy prices I had forecast the consumer deserves a break and that models were seeking a top for a correction of this decade's bull market. A decline of spot crude oil from $140 to $100 is large enough break to assume the consumer does not deserve more. This market is under valued. Timing wise the models suggest although price is low enough for a bottom the first but ideal time for a bottom is in October. I think there is chance the lowest price will be this month but models will probably remain with use of the low of next month. My forecast remains bullish for the energy markets into 2010. I expect $150 for 2009 and perhaps to $180 for 2010.

Commodities

This decade's bull market is not over. Too many fundamental and technical factors remain on the table.

Futures

The futures exchange industry should conduct a 10 for 1 split for agriculture markets or to a level that a contract represents $2,000 to $3,000 of commodity. Commission and all fees should correlate with the split -reduce. This will create a more sensible, affordable and useful market place. Futures have never been a level playing field or user friendly product for the average to smaller investor or hedger. With historical high prices but economics suggesting we will not see complete retracement for decades if ever then these issues are more so. Average to small size hedgers need smaller units to scale in or out of a business risk protection program. Large commercials have this advantage. And this would allow for better growth of the industry at large. Our foreign competition has a leg up on us in this feature.

The near 24% decline in milk futures this year is the crime of the decade in my opinion. Producers have a right to complain. Milk is extremely under valued according to my studies. Milk dragged its feet during the commodity bull run this year with not keeping up with relative price performance, inflation and higher production cost. And then as insult milk futures declined with seasonal decline of some commodities but as a leader in some instances. Interesting that milk decided to follow seasonal trends of other commodities rather than its own.

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