January 9, 2019
Government Shutdown - And How it Affects the Dairyman
On Wednesday, the U.S. Government entered the 19th day of it's partial shutdown which marks the 2nd longest in our nation's history. The night prior, President Trump addressed the nation from the Oval Office with the goal of moving his proposed 5.7 billion dollar border wall forward, the culprit of the shutdown. With the stalemate on this issue deepening, some Ag related offices and reports are being affected as funding is no longer available.
One office that is affected by this partial shutdown is the USDA Farm Service Agency (FSA) which administers farm programs, loans, etc. NASS statistics and World Agricultural Supply and Demand Estimates (WASDE) reports may be delayed or fail to be released if the shutdown continues. The scheduled January 3rd Dairy Products & January 11th WASDE reports are the first major reports to be suspended. The Milk Production and Cold Storage reports, due out over the coming two weeks, will be a watch point for the dairy industry. Dairy Revenue Protection (DRP) sales which began October 9th, 2018 and are provided through the USDA Risk Management Agency (RMA) have been postponed as well. This prevents producers from being able to apply risk coverage during this period.
CME products and milk futures trading have carried on like normal despite the Government shutdown. The barrel cheese over the past 3 trading sessions has fallen 4.75 cents/lb and returned to $1.245/lb. Current barrel price sets the stage for another potential test of $1.20/lb for which we had held on 4 separate occasions in 2018. See above. Milk futures have enjoyed an uptick in the market since the beginning of December 2018. Second half futures started December around $16.30 and closed the month at $16.52/cwt. See below.
All in all, there is a substantial amount of risk left in this market. $16.80/cwt milk has essentially capped the milk market over the past 4 years. Currently, 2nd half futures are offering near $16.50/cwt prices. Option strategies are a really good method to defend these prices as upside can be preserved. DRP, whenever the government reopens, will be another route to consider. Give us a call to talk through strategies suitable for your operation.