Wild times for Wisconsin ag commodities

The last few days in June were wild ones for commodity markets important to Wisconsin farmers, according to Ed Jesse, CALS agricultural economist and interim associate dean for extension. Jesse presented the following report to the college’s executive team on July 2.

On June 28, cash cheese prices on the Chicago Mercantile Exchange (CME) lost about 6 percent of their value after having climbed to more than $2.00 per pound for only the second time in history. Futures prices on the CME for all 2007 Class III milk contracts (used to make cheese) moved limit down (75 cents/cwt.) after the cheese crash. June 29 brought another limit drop.

These big price drops for cheese and milk were related to the anticipation and actual release of USDA’s crop acreage estimates on June 29. Dairy prices had been propped in part by speculation that strong demand for corn to supply ethanol plants would tighten corn markets, sharply elevating corn prices and the cost of dairy feed. In turn, this was expected to suppress milk production and supplies of dairy products. Contrary to these expectations, the USDA report estimated U.S. corn plantings at 92.9 million acres, up 19 percent from last year and 3 percent more than estimated by USDA in March. With normal yields, the 2007 corn crop will be adequate to supply normal feeding needs as well as the expanding corn requirements of ethanol plants. This eased dairy trade fears of a cutback in milk production.

USDA’s planting report caused further sharp reductions in corn futures prices, which had been sliding steadily since mid-June. The Chicago Board of Trade (CBOT) Dec -’07 corn contract traded above $4.30 per bushel on June 18. Since release of the planting report, the futures price has fallen to under $3.40 per bushel.

In contrast to its bearish effect on corn markets, the USDA report had a bullish effect on soybean and soybean product prices. USDA acreage estimate confirmed that much of the gain in 2007 corn acreage came at the expense of soybean acreage – down 15 percent from 2006. In reaction to the USDA acreage report, CBOT soybean futures opened limit up (+50 cents/bushel) on June 29 before easing back 10 cents by closing. New crop futures prices for soybeans are flirting with the $9 per bushel mark compared with the 2005/06 season average price of $5.66 per bushel.

While dairy markets remain nervous, cheese prices have gained a few cents since their free-fall and Class III milk prices have regained most of their earlier losses. Traders’ worries that corn would be in short supply may have been replaced with a new fear that prices for soybean meal – an important source of protein in dairy rations – will continue their upward climb and squeeze dairy farmer’s margins enough to force cutbacks in milk production. It seems that the only certainty in commodity markets this summer is uncertainty.