11-20-2017: December Milk: Absence of Positive News

(Click on links below. Whole page needs to load before links work.)

Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calend Spread

Level Table
Other Factors
Recommendation

5      7

1     01

2     3

4     6


Introduction

Milk prices is very cyclical. The dairy industry is a highly regulated industry. Government programs have large effects. But they also add a measure of "stability" to prices which suggests to us that if we are near the bottom of a cycle when everyone is sellilng, it is time for a reaction.

However, having said that, our analysis suggests the current downward spiral in milk prices due largely to oversupply is reflective of something much more signficant than average outside the view of normal news sources. We don't know exactly what is going on, but feel current milk price weakness goes beyond average and is heading into major downtrend. Milk spoils rapidly, but many supplies are in powder form, and are not used up readily even as production measures are adjusted. We'd like to think milk prices will bounce back from this, particuarly in a heavily-regulated industry, but there is some evidence from major influentials predictors such as the USDA that estimates are being revised downward for 2018.


Intermarket Analysis

We fed Cl. III Milk, Feeder Cattle, and Live Cattle into a neural network to get the following result:




Parabolic Chart

December Milk:

Parabolic Chart


Nirvana Chart

December Milk

Initial Chart


News Analysis

Lower grain prices may be signaling lower milk prices. The American Farm Bureau believes tax reforms like those introduced in the House of Representatives under "Tax Cuts and Jobs Act" will be a net benefit to farmers. Things like cutting out the estate tax, providing for increased expensing of capital asets, and reducing individual rates to four brackets would help family farms. The bill would segregate profits from labor and proifits from investments. Income from investments would have a lower tax rate. The proposed bill may not allow tax benefits for cooperatives to be passed through to individual farmers.

Farm Bill negotiations are near the top of the list in current diary concerns. Leaders hope for a better safety net for producers and increased domestic consumption through the Supplemental Nutrition Assistance Program (SNAP). Another 2 billion people to feed on the planet are anticipated for 2018.

Cointinuing negotiations on revising NAFTA have been ongoing for months. Producers in Canada are discouraged from the results of these so far. Beef and pork see negotiators on the same page, but it is different for dairy considerations. Canadians would like to improved labor standards, environmental standards, gender rights, indigenous rights (native Americans), expanded procurement and an end to "Buy American", better processes to regulate anti-dumping, and just generallyi "thinning the border."

Animal abuse in dairies in Florida and California have underscored need for continual vigilance in the area, not exactly fostered by the current Administration which recently even considered allowing importation of ivory and other banned endangered elephant products. Publix markets in Florida suspended dealing with that state's largest milk producer after allegations of mistreatment of cows.

In some supermarkets in Australia, milk sells for a price per liter less than for bottled water. Although the result of competitive practices there, it cannot last in Australia when water is $3/liter and soda $5/liter.

Significant increaes in electricity costs in New Zealand could help drive up the price of milk.

Dairy farmers are making major investments in Ireland to bring facilities more indoors to prevent freezing in pipes and milking equipment.

Milk makers have fallen almost 90% in number since 1970 according to the USDA. There has been a significant rise in the amount of milk produced by each cow. Dairy concerns have been screwing around with the anatomy of cows to get more milk out of them. Resulting bad dairies cause unhealthy cows, pushed beyond their normal use. Dairy cows are often so wrecked that they cannot be used foir beef later on. There are 2 million fewer milk cows today than there were in 1980.

The USDA "Market Outlook" predicts $16.90 - $17.80 oer cwt for 2018, a reduction from last month's forecast of $17.45 - $18.35. Milk production forecasts have been lowered. The fourth quarter of 2017 milk production forecast is 53.5 million pounds. 0.1 billion less than last month's forecast. 2018 milk production is forecast at 07 billion pounds below last month's forecast. There are current high global stocks of dairy products.

A new milk price cycle will start in 2018. Overall, it takes 3-12 months from a price signal on the world market to change in milk supply growth. A key driver for dairy price cycles is that delay of national milk supply reaction on world market price trends.

"Mailbox prices" reflect the actual price dairy operators receive for their milk, hence the name "mailbox price." Mailbox prices are reported at average fat tests and reflect all premiums, as well as marketing costs including hauling. In California the mailbox price is up 80 cents from the July average. It is typically lower than most other states.

Our assessment of what news we can find suggests that there is no major reason for declining milk prices other than normal cycles that affect the industry. The cyclic nature suggests to us that in time prices will rise again, and absence of negative news is overall positive for milk prices.


Point & Figure Chart


 19.0I                                                                  R 11/17
     I CME - Dec-17 Milk Cl.III, 200K lbs. c/lb    Cm.=0.01  Lim.= 0.8
     I
     I
     I
 18.0I_________________________________________________________________________
     IX                       X
     I                        XO
     I        X X             XO    X
     I        XOXO            XOX X XOX   X X
  17.0I_O______XOXO____________XOX_XOXOXO__XOXO_________________________________
     I O      XOXO  X         XOX XOXOXO  XOXO
     I OX     XOXOX XO        XO OXOXO O  XOXO
     I OXO    XO OXOXO        X  OXO   O  XOXOX X
     I OXO    X  OXOXO      X X  OX    O  XOXOX XO
 16.0I_OXOX_X_X__OXO_O______XOX__OX____O__XOXOX_XO_____________________________
     I OXOXOXOX  O   OX   X XOX  OX    O  XO O  XO
     I O OXOXOX      OXO  XOXO   OX    OX X    OXO
     I   OXOXO       OXO  XOX    OX    O OX    O O
     I   OXOX        O O  XOX    OX    O OX      O
 15.0I___OXO___________O__XOX____O_____O_O_____________________________________
     I   OX            O  XO           O
     I   OX            O  X
     I   O             O  X
     I                 O  X
 14.0I_________________OX_X____________________________________________________
     I                 OXOX
     I                 OXOX
     I                 OXOX
     I                 O OX
 13.0I___________________OX____________________________________________________
     I                   OX
     I                   OX
     I                   OX
     I                   O
 12.0I_________________________________________________________________________
     I
     I
     I
     I
 11.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
      1111            11          11          1111
      22221222456677880112567778990211224456780001
      00122112210122020012210012013211020000000120
      12946073032737576444741545721108213758375751
Our computer tells us a non-conventional reactive approach works best for Milk on p&f charts. Therefore the above chart is taken as giving a buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "%R." It is giving a sell signal.

Internal Printout 1 Internal Printout 2

Results of "%R" for Milk (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system is working on a long-term sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $2,000. Initial margin on a single contract is $1,100. Use of options is not advised.


Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-long.

Commitment 2


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major down trend is intact from the last volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Milk March 13.50 Put and Sell (1) Milk March 13.75 Put @ 0.07 to the sell side or greater.


o 1 o 2 o 3 0 4 o 5


The following is an effort to track previous option trade prices if positions were held indefinitely.


*** It should be understood that some of these trades may have gone through periods where they were very profitable before moving out of the profitable range. This can be tracked by reading the "Option Trade" section of the corresponding article and noting on the option graphics chart shown there the corresponding profit or loss for previous underlying commodity prices. Thus any of the above trades might be or have been profitable if terminated at the right time, underscoring as with all commodity trades the importance of continuous monitoring.


Calendar Spread

What the Dec. - Mar. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go flat in the long run. The best time to enter or leave the above spread is when it is at 0.80 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at 2.25 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be at tje buy the far, sell the near point.





Level Table:

Level Table

The path of least resistance is down.
 18.0|                                                                  R 11/17
 CME - Dec-17 Milk Cl.III, 200K lbs. c/lb    Cm.=0.01  Lim.= 0.8
     |
     |
     |
 17.5|D________________________________________________________________________
     |BDDFFSS
     |BDDDFFOSS
     |ABBBDDDDFFOSST
     |AABBBBCCDDDDFFFOSSSTTTT
 17.0|AAAABBBBBCCCDDDEEFFFOOSSSTTTTTTT_________________________________________
     |AAAAAABBBBCCCDDEEEFFFFGOOSSSSTTTTT
     |AAAAAABBBCDDEEFFFFFFGGOOOOSSSTTTTTT
     |AAAABBBCDDDEEFFFFFGNOOOSSSTTTTTUU
     |ABBBBBCCCDDEEEEFGNOOPPQQRRSSSSTUUUY
 16.5|ABBBBCCCCCCDEEEEEEGNNOOOOOPPQQQRRRRRRSSSSTUUXXXY_________________________
     |BBBCCCCCDEEGGGMNNNOOPPPQQQQQRRRRSSTWXXXYY
     |CGGGGGMNNNNNNNPPQQQRSSSUUUUUWWWWWWXYY
     |GGGGMMNNNNNNPQQRRSSUUUUUVWWWWWXXXYYY
     |GGHHMMNNNNNPPQRRRUUUVVWWXXXXYY
 16.0|GGHHMMMPPRRRUVVVVWXXXY___________________________________________________
     |GGHHHHMMMPPPPPRRVVVVVWWYYY
     |GGHHHHHKKMMMMPPPPQQVVVVVVWYYYZ
     |GGHHHMMMQQQVVVVVYYZZZ
     |HHLMMQQVVXXYZZZZZZZZ[
 15.5|HKLLMXYZZZZZZZ[__________________________________________________________
     |HHHJJKKKLLLLMMYZZZ[
     |HHHJJJKKKKLLLLMYZZZ[
     |HHJJJJJJJKKKKLLLLLLLYZZ[
     |HJJJJJJJKKKKKLLLLMMZ   <<<
 15.0|HJJJJJJJJKKKKLL__________________________________________________________
     |HJJJJJKKK
     |HJ
     |H
     |
 14.5|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.417
       1 1 1                                       1 1 1 1           1
       1 2 2 1 1 2 2 3 3 3 4 5 5 5 6 6 7 7 8 8 9 9 0 0 1 1           1
       2 0 1 0 1 0 1 0 1 3 1 0 1 3 1 2 1 2 0 2 0 2 0 1 0 1           1
       1 5 9 4 9 2 6 3 7 1 7 1 5 0 3 7 2 6 9 3 7 1 5 9 2 6           7


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 7/11 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                  DAZ7    December Milk Cl. III

                      High Price:  15.93
                   Current Price:  15.27
                       Low Price:  13.92

                            Risk: -0.088
                     Opportunity: -0.181

                    (O/R) Ratio =  2.045


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart - 1
Nirvana Chart - 1
News + 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility - 1
Level Table - 1
Other Factors - 1
Total - 4
Place 13 December Cl. III Milk on a Sell Watch with stoploss @+0.69 above get-in point when recent price is represented as "15.27".
____________________________________________________________________________________________________________________________________________B.M.