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Heat causes lower milk production -Rich Posson

The August monthly milk production report, due for release Thursday, should offer a reduction of milk production. Following several years of a relentless trend toward higher production, we may finally see a decadal cycle toward lower milk production that can last into 2012. 

Milk

A reduction of production should come from extreme US heat, high humidity for the northern states, and crop destruction from drought for the southern states. Over the next 10 months, some southern states dairymen will have to import forage and grain from the northern states, as well as deal with cattle loss due to extreme heat. Such a heat wave has lasted long enough to consider long term damage to milk cow productivity.

If, by chance, the upcoming report does not show much of a decline or no decline of production, be patient, future reports will. And, keep in mind that since the 1960s if price was lower due to higher production is was more from an excuse or economy problems, that in general monthly production and monthly price were of a positive correlation suggesting in general we pay more for higher production. Whereas a sizable cut in production can cause a ballistic higher price characteristic. 

The model correctly called for a climate problem this year and this without the use of La Nina characteristics, which were also present. The model correctly anticipated the long term bull market trend from July of last year, and currently assumes the current decline in price is only a minor intermediate intra year trend known as the L2. With the recent peak of the L2 trend as higher than a previous and more important L1 trend top, and the L1 as the most important intra year trend followed by the model, the model correctly offers the opinion that the recent high of 2011 is unfinished business, and so once the L2 has bottomed, milk should rally into, if not through September and to a new high price for 2011, and for the next L1 top.

The model assumes milk is under valued relative the intermediate trends, while being fair valued with good demand relative a long term trend, but with the coming supply crunch, current fair value price level will become a under valued price level. Long term studies suggest milk is worth a record $27 C3 per cwt for 2012.

Feed costs

I was interviewed by a film producer, and this was during the first few months of 2011.  I offered a crop problem for at least corn, and a relative cyclical production model, plus a climate model opinion. I am looking clever, now. And I have a DVD for proof.  For several years, I had forecast a corn yield in the 140's and in-relation to this cycle. If such does not occur this time around, there will be crop risks until 2014, which is the latest allowed relative the pattern of production since 1866, where as the climate model would prefer such a “hit” to occur no later than 2012.

Currently, the model is bearish price of grain over the next few weeks and perhaps into September. But, the model is bullish for price from October to December, and relative still larger trends, bullish into 2012. Currently, demand is weak enough to limit appreciation of price, a lazy bull market at best, and the trade may hope for some sort of a seasonal decline. But with the obvious crop damage and no evidence of a crunch of demand, even with a soft economy, the free market will likely require higher price some day. 

With cattle prices likely in a bull market (beef that is) and hogs capable of passing on input costs even with higher production, milk price has no choice but to rally, to ensure production.

Economy

I over estimated the pace of the economy, but in general, the model was correct this year, and continues to forecast growth into 2012, albeit slow, but with hopeful exponential pace.

Stock market

The model correctly forecast the recent top in the stock market relative the DOW index, and a related program sold 7/26/11, well ahead of the mini crash. The model assumes the stock market over estimated economic growth, and therefore the market was a bit over valued, but with a collapse from near 12,800 to near 10,600, the stock market is not only under valued, but due for the smallest of long term business cycle bottoms. The forecast is bullish from August 2011 into 2012. The stock market is considered a leading economic indicator, but my guess is for only certain trends or moments of correlation.

Energy

Oil price is under valued per model research, the forecast for higher price from 2009 to 2012, and perhaps into 2013, remains intact.

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Written by By Rich Posson, CMT

Ag Financial Strategies 1-877-AGFS, afs@ag-financial.com

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