Cheesy Dairy Market Concerns

The chart of the week is the international cheddar and the CME block cheese markets.  US cheese inventories are historically ample and September US cheese output was 4% larger than the previous year.  Still, the cheese markets are moving higher.  Actually, basically all of the dairy markets are moving upward.  The first major culprit is the decline in US milk output.  The trade is anticipating a decrease in the available supply of dairy products in the coming months.  But another major reason is due to the recent run up in the international dairy markets.  The international cheddar, butter, whey and milk powder markets have all surged more than 30% since the beginning of September.  European Union dairy farmers, which typically account for 47% of the world’s cheese production and 40% of the world’s cheese exports, have been challenged during the past year with poor profitability leading to rising dairy farmer protests.  EU milk production is declining and decreases should intensify in 2010.  Additionally, the value of the US dollar has fallen roughly 18% during the last eight months.  Both of these factors encourage US cheese exports which was the major impetus behind the inflated cheese and dairy prices in 2007-08.  And the situation are similar for the rest of the dairy complex.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Cheese Bullishness

The chart of the week is the US CME block cheese and international cheese markets.  As one can tell from the chart, the two markets have trended fairly well together during the last eighteen months or so.  Why is this?  Well, the principal reason the surge in cheese prices started in the spring of 2007 and continued throughout most of 2008 is due to an increase in US cheese exports.  You may remember the scenario.  New Zealand, the world’s largest dairy exporting country, was in the midst of a two year drought which had caused their milk production to notably decline.  The EU, the world’s largest dairy exporting region, had stopped subsidizing dairy exports and their dairy cow herd was shrinking.  And, the US dollar was historically depressed.  You may notice that both markets have moved upward in recent weeks.  World dairy prices at the levels experienced during the spring of this year really aren’t sustainable with the existing feed cost structure in place.  Additionally, the value of the US dollar has declined 4% since August and is currently trading at fourteen month lows.  Further, the EU, the world’s largest cheese producing region, is reducing the size of their milk cow herd which could lead to a halt in cheese production growth.  That being said, the fundamentals may not support the intensity of the recent cheese market increases.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Prime Beef Supplies

The chart of the week is the weekly number of cattle slaughtered that grade prime.  As well documented for the past year, the percentage of cattle grading choice has been trending well above prior year averages.  This is due to a couple of factors including the trend of cattle staying on pasture longer and entering feedlots with greater maturity.  At times during the past year, the percentage of cattle grading prime has also trended well above prior year averages.  Right now is one of those times.  The number of cattle that graded prime during the third week of September was the largest for any week in thirty-four months.  During the first nine months of this year, both choice (1.8%) and prime (2.4%) beef production are estimated to be modestly larger than last year despite nearly a 4% decline in overall cattle slaughter.  The trend of abnormally high percentages of cattle grading choice and prime may continue, at least for the near term, and could be bearish for choice and prime beef prices.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Beef Prices and the Aussies

The chart of the week is the value of the Australian dollar (versus the US dollar) and the US 90% beef trimmings market.  What does one have to do with the other?  Good question!  First we remember that beef processors utilize trimmings to make various beef products including the ever popular hamburger.  Typically, a hamburger processor will mix 90% beef trimmings with a fattier trim, say 50% trimmings, to make their product.  In the US, we produce at lot of fattier beef trimmings.  So much so that we have an excess of 50% trimmings and a shortage of 90% trimmings.  Thus, we have to import a considerable amount of lean beef to make up the deficit.  And a lot of that lean beef comes from Australia.  We remember that when our currency is weak, it makes international products more expensive to us and our products less expensive to the world.  So, typically the impact of a rising Australian dollar is a deterioration in US lean beef imports which can be bullish for the 90% beef trimmings market.  Notice that 90% beef trimming prices set record highs in the summer of 2008 at the same time the Australian dollar valuation was setting a record versus the dollar.  Now you may notice that despite the recent run up in the Australian dollar (it made 13 month highs this week), the US 90% beef trimming market has mostly moved lower.  This is due partly to the recent increases in dairy cow slaughter.  However, dairy cow slaughter cannot be sustained at these levels for long and history tells us that neither can the 90% beef trimmings market at the current levels if the Australian dollar remains elevated.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Still Watching Chicken Production…Closely

The chart of the week is weekly chicken production and the boneless skinless chicken breast market.  Chicken producers have pretty much kept chicken output curbed throughout 2009 thus far.  However, as the chart indicates, chicken production has edged upward since July.  Broiler egg set numbers during the spring and early summer, which give us an indication of pending chicken production levels, did trend ever so slightly upward from earlier in the year which is partially behind the increase in chicken production.  But the biggest factor may be the relatively cool temperatures experienced in recent months throughout most of the country which has limited bird death loss.  The result is that chicken production during the last week of August was the largest for any week not following a shortened holiday week in nearly a year.  How have the markets reacted?  The chicken wing and leg quarter markets have held their own but the breast markets have been week.  So much so that the chicken breast markets moved counter seasonally downward in August.  As of September 9^th, the daily chicken breast index was in the low $1.20’s per pound, roughly $.30 off its high made in early July.  The general trend for the chicken breast markets is downward during the fall.  If pending chicken production is not curbed some then any imminent chicken breast declines could be steeper than the industry is anticipating.  Not good news for chicken producer margins.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Ethanol and Corn Dancing Again

Several months ago I wrote about the relationship of corn and ethanol and how inflated corn prices, amongst other factors, were causing the ethanol industry to come to a crossroad.  If you remember, ethanol producer margins were struggling and financial demand incentives for their product were basically nil.  The chart of the week is the economic incentive for gasoline blenders to utilize ethanol.  What in the world does this have to do with the food commodity markets?  A lot and then some.  Why?  Because ethanol in the US is primarily made from corn and corn is one of the major feed ingredients (and thus input costs) for protein and dairy farmers.  Ethanol in the US is almost entirely used to blend with gasoline at a 10% blend or less.  As a matter of fact, ethanol is most likely in your gas tank as you read this.  Roughly 5.5 billion gallons of ethanol annually have to be blended with gasoline in high pollutant areas of the US per the 1991 Clean Air Act.  However there is an additional 7.2 billion gallons of annual ethanol production capacity in the US (and it is growing) that is driven by economics.  In other words, does it make financial sense (or cents) for gasoline blenders to blend with ethanol or not.  The formula for the blenders’ incentive is simple; so long as the blenders cost for ethanol is below the cost of wholesale gasoline then it is a profitable endeavor.  With the existing $.45 per gallon subsidy that blenders receive for utilizing ethanol, the existing incentive is roughly $.70 a gallon…much better than earlier this year.  Models indicate that ethanol producer margins are solidly in the black as well.  And let’s not forget that the EPA is expected to soon increase the maximum blend percentage of ethanol from 10 to 12% which could further increase demand.  In short, ethanol and corn are not only once again dancing, they’re boogying.  The ethanol producers just have to make sure that a notably bearish crude oil market or late corn crop catastrophe doesn’t try to cut in on their groove.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Milk Supply is Changing

The chart of the week is the monthly milk production change compared to the prior year.  As one can tell from the chart, it’s been a long time since we have experienced a decline in milk output.   How long?  How about sixty months or five years!  It’s been a great run for milk production but the trend is almost certainly coming to an end.  Milk production during June and July were only up fractionally from the previous year and that is due in a large part to relatively cool weather relieving stress on cows.  However, in June and July we experienced some of the largest net reductions in the milk cow herd in the last 10 years.  August has likely experienced a strong milk cow herd reduction as well which has us believing that this month will be the first in five years to experience a milk output decline compared to the previous year.  And with the CWT herd subsidized retirement issue, milk output declines are anticipated to intensify in September and onward which should be bullish for the dairy markets.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Commodity Bullishness

The chart of the week is the US dollar index and corn prices. The US dollar index measures the performance of the US dollar value versus a basket of other currencies including the Euro, Yen and Canadian Dollar. After peaking in March the value of the US dollar index has fallen roughly 13%. That’s enough to warrant press in itself but what’s increased our attention is the dollar’s recent move through a key chart support level suggesting that another downward leg in the market may be in the works. Charts suggest that the dollar could fall all the way back to its summer 2008 lows which would be about another 8% decline. Why is this important to commodity buyers and sellers? A lower US dollar value basically makes our products less expensive in overseas’ markets and makes international products more expensive at home. Thus, a deflated dollar is bullish for exports, bearish for imports, and bullish for US commodity prices. The chart below depicts the inverse correlation (82% for those keeping score) between the dollar and US corn prices. Similar charts could be constructed for numerous commodities. And even if a particular commodity market is not export/import sensitive, chances are that market will be bullishly impacted by a bull run in corn.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Pork Producers Persistent Problems

The chart of the week is sow slaughter. First we remember that sows are the breeding inventory for swine and that a build up or reduction in the sow herd can give an early indication of pending pork production levels. As one can tell from the chart, sow slaughter during the first 6 months of this year was anything but alarming from the buy side. As a matter of fact, one might be able to derive from the chart that the breeding herd could actually have increased during the first 6 months. June sow slaughter was the largest in 8 months, but sow slaughter since then has basically trended near 5 year average levels. This is certainly alarming news for the sell side of the equation. Hog producers have continued to struggle with poor margins. And although the breeding herd is smaller than a year ago, growth in pig per litter yields have caused the overall hog supply to remain abundant. So much so that live hog prices this week are trending 32% lower than the same week a year ago. There have been recent announcements of some sow herd reductions, but more will almost certainly have to be done. Pork demand remains poor, pork prices are deflated, and the futures markets are not presenting a profitable hedge opportunity for hog producers until the spring at the earliest.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Another Choice Beef Surprise Coming?

The chart of the week is the estimated number of cattle slaughtered that graded prime. Up until roughly 18 months ago, the trend for the percentage of premium graded cattle was downward. But since then there has been an abnormally high percentage of cattle that have graded at least choice. Due to this, choice and prime beef production were notably larger than the prior year during the better part of the winter despite the lower overall beef production. As one can tell from the chart, however, prime cattle slaughter has been trending below year ago levels in recent months as the prime grade percentages have returned to more normal levels. Choice cattle slaughter has mostly remained above a year ago up to this point. Consequently, in this time period some choice beef cut prices have not appreciated as much as their prime counterparts. Going forward I will be watching both choice and prime cattle grade percentages closely. In three of the last four months reported to date, the monthly average weight of cattle placements into feedlots has been below the same month a year ago. In May, the average placement cattle weight decline compared to the prior year was the largest for any month since September 2006. Typically, lighter cattle placement into feedlot weights translate to lighter cattle slaughter weights which is not favorable for premium cattle grades. This would suggest that the percentage of cattle grading choice could wane over the next few months. If we do get a downturn in cattle slaughtered that grade choice, it may be bullish for the choice beef markets even in this challenging economic environment.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.