Rich Posson: Cheese market a late bull; commodities take a rest
July milk production was up .1% from previous year, per cow production was up 25 pounds at 1769 and the number of producing cattle were down 115,000 head relative previous year and down 34,000 compared to previous month. The low price of milk is forcing liquidation while it might be said that rate of production increase is slowing. There has been much discussion of farmers forced to sell at below cost of production but with the US recession such discussion does not always make the national media desk as in the past.
The models offer a 3-year business cycle bottom as of low of this year and the forecast is bullish milk price into 2010 and a still larger trend offers support into 2012 to 2013. The long term objective is for a new record high but first hurdle is current record high and there is a strong industry based sentiment to keep the trading range from 1980 to current -- intact. "They" will fail at this over the next several decades and there have been new record highs since late 1990s. Spot milk had been extremely under valued relative inflated disaster price of the 1930s and had been a poor performer relative many commodities. In recent weeks the cheese market has shown signs of realization the economy although recessive is not as severe as feared and is in recovery. CME cheese price recently rallied by 30% to post performance similar to other commodities that rallied earlier in the year. Better late than never.
The models for a milk strip study show L1 major intermediate trend bottom in January or February and L1 top in March followed by L2 bottom in April, L2 top in Jun and L1 bottom in Jun. The strip price then rallied by a sizable amount into August and is due for a L1 major intermediate trend top along side a seasonal top that on average arrives during August or September. The forecast is bearish into a L2 bottom due in September and the forecast is bullish from this correction point into year end.
From a technical perspective it seems milk was a bit overbought and the model forecast for a correction may be underway. It seems that cheese may be of more sustainable price trend than milk futures and this may come from lingering hedge pressure of concerned inventory managers who sell carry for scalp trade. I would be cautious of this as the bear market has come to an end and carry sellers on the farmer side have not been the winners past several decades that some advertise. I pity the farmer who did not forward sell or hedge last year into early this year and sells now and for 2010 in that it could be a set up for a losing hedge year following a losing business year. I recall hearing of a dairy that did just that years ago and although that dairy was in financial trouble to begin with -- the dairy did not survive the losing hedge year. I think it best to assume the real risk moving forward is on the consumer side. The procurement side should consider the dollar risk when milk rallies from $13 to $24. And so I believe the producer needs to be more flexible and the consumer best consider length of hedge for an increase.