05-13-2018: July Milk Class III : Oversupply and Decreasing Demand

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

1     2

01     4

5     6


Introduction

While producers in the U.S. favor competition, many foreign countries including Canada are doing a much better job of supply management and controlling milk prices that are very volatile in the U.S. Disrupting foreign trade may not do all for American producers as claimed as our ability to export is diminished. Cheese and powdered milk are primary exports from here. Milk futures prices most likely have been rising on speculation that supplies from Canada will be cut off in NAFTA renegotiations. Butter has made a comeback in Canada, which means a surplus of non-fat solids. To deal with the surplus, the Canadian dairy industry created a new milk class called "Class 7" to price milk incredients like protein concentrates, skim milk and whole milk powder. Requriements to meet Class 7 standards allows Canada to resist importing other types of milk from the U.S. American dairy farmers are also worried that they may not have access to the Mexican diary market as the President renegotiates treaties. Those exports are worth about $1.2 billion. That's nearly double the volume of exports shipped to Canada. The U.S. currently has a trade surplus of $400 million worth of dairy products with Canada. The collapse of the Trans Pacific Partnership also hurt American dairy farmers.


Intermarket Analysis

We fed Milk, Live Cattle, and the U .S. Dollar Index into a neural network to get the following result:




Parabolic Chart

July Milk Class III :

Parabolic Chart


Nirvana Chart

July Milk Class III :

Initial Chart


News Analysis

Dairy issues between the U.S. and Canada have yet to be resolved. The White House says dairy discussions will be a "ninth inning push." Renegotiation of the NAFTA treaty discussions are coming to a close. President Trump is supposed to understand the importance of leveling the playing field with Canada on dairy. But throughout NAFTA talks, Canadian negotiators have remained firm on protecting their supply management system, including "Class 7." U.S. dairy officials have called for the repeal of Class 7 since it caused significant market disruption for processors and dairy farmers in Wisconsin, Minnesota, and New York last year. Speaker Ryan expedts a NAFTA deal conclusion by May 17th.

Milk prices have taken on a decidedly positive movement over the past month. Some are predicting the first 2 months of 2019 and the last four months of 2018 will average about $2.00/cwt above this month's milk price. This prediction may be more of a mirage than a realilty. Margins continue to be suppressed in March, even though milk prices improved, due to higher feed costs. The escalating price of soybean meal and corn will support higher milk costs. The survival of a daity operation will hinge on management's ability to find ways to push tghe cost of production below $17.50/cwt. while maintaining some level of investment in their operation.

There have been new appointments to the USDA's Food Safety and Inspection Service leadership. Sec'y Perdue appointed Rottenberg and Kiecker to those positions.

A May World Agriculture Supply and Demand Estimates (WASDE) Report preicts higher milk prices ahead. Cow numbers are expected to remain near 2018 levels, but global demand is expected to increase. Cheese and non-fat dry milk expect to see strong exports. Higher cheese prices offset lower butter prices.

The U.S. Northeast is prepared to begin milk dumping. Too much production and not enough processing capacity plus lower fluid milk sales are responsible. Federal Milk Marketing Order pool volume in 2017 in the Northeast was running 1.4% above 2016. Agri-Mark had to dump some milk because a dryer at its WEst Springfield, MA plant went down, and the coi-op had no way to process leftover skim milk. Land O' Lakes requested that framers be allowed to dump milk on their farms and still be paid for it, which was granted by the Federal Government until July 1st. Last year about 170 million pounds of milk was dumped in the Northeast market, up from 119 million pounds in 2016.

The Canadian system balances milk supply with consumer demand, while that is not happening in Vermont, where the Vermont Agency of Agriculture says 12 farms have gone out of business so far this year. Nearly a decade ago, Vermont farmers were unable to get a supply management system through Congress. Milk industry lobbyists blocked the attempt and are aligned against it today. Farmers in areas where dairy farms are still expanding, such as South Dakota, always oippose production controls.

Regular milk is an important source of iodine for women and thyroid condition without which one can put on weight. Almond milk which is popular and competes with regular milk lacks this component, only containing about 1-2% of the amount of iodine in regular milk. The World Health Organization is concerned about iodine deficiency in women. Milk consumption has been dropping due to consumers drinking nut and soy-based milks. People on the U.S. are drinking about 3 gallons less per year than they did in 2010.

Walmart announced it would be opening its own milk-processing plant in Indiana, causing Dean Foods stock to fall as they are a supplier of milk to Walmart. Dean Foods was in turn forced to end contracts with farmers.

In India farmers have been spilling milk from trucks on the roadways as parft of a strike. Farmers are demanding loan waivers after being distressed over falling prices of agriculture produce.

Advertisements and commercials like "Got Milk" have dired up. Billboard use has been decreasing. An effort to offer whole milk in schools in New York State is on as schools there offer only skim or powdered milk.

Farmers have an impossible time budgeting. In 2014 milk hit $27, then dropped to $18 in a matter of months and has often gone as low as $14.

More U.S. milk will be coming from cow-milking robots, cutting the number of dairy farm workers by 50%. 20 to 30% of farms will use robots in the foreseeable future. Robotics for dairy farming is already a $1.6 billion industry. Early models didn't work very well, but the technology has now become feasible and reliable. One robot can handle about 60 cows per day. Cows seem to prefer robots because they aren't interrupted by humans all the time. This means higher quality milk because the animals are less-stressed.

Russia has been trying to influence distrust of genetically modified foods. Scientific data says GMO crops are safer and better for both humans and coiws. But news articles related to GMO's featured by Russian-backed news outlets go along with a ban on GMO crops in Russia.


Point & Figure Chart

 19.0|                                                                  R  5/11
     | CME - Jul-18 Milk Cl.III, 200K lbs. c/lb    Cm.=0.01  Lim.= 0.8
     |
     |                              X
     |              X               XO
 18.0|__________X_X_XO______________XOX___X_X_X_______X________________________
     |          XOXOXO              XOXOX XOXOXO  X   XOX
     |X         XOXOXO              XOXOXOXOXOXO  XO  XOX
     | O        XOXO O  X X         XOXOXOXOXOXO  XO  XOX
     | OX       XO   OX XOXO        XO OXO O O O  XOX XO O  X
 17.0|_OXO______X____OXOXOXO________X__OX______O__XOXOX__OX_XO_________________
     | OXOX     X    OXOXOXO      X X  OX      O  XOXOX  OXOXO
     | OXOXOX X X    O O O O      XOX  OX      O  XOXO   OXOXO
     | OXOXOXOXOX          O    X XOX  OX      O  XO     O OXO
     | O OXOXOXOX          O    XOXO   OX      OX X        OXO
 16.0|___OXOXO_O___________O____XOX____OX______OXOX________O_OX________________
     |   OXO               O    XOX    OX      OXOX          OX
     |   OX                O    XOX    O       OXO           OX
     |   OX                O    XO             O             OX
     |   OX                O    X                            OX
 15.0|___O_________________O____X____________________________OX________________
     |                     O    X                            OX
     |                     OX   X                            OX
     |                     OXOX X                            OX
     |                     OXOXOX                            OX
 14.0|_____________________OXOXOX____________________________OX________________
     |                     O O OX                            OX
     |                         OX                            O
     |                         OX
     |                         OX
 13.0|_________________________OX______________________________________________
     |                         O
     |
     |
     |
 12.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
      1111                              1111              1111
      222212222345666677778812345667789902221122344677788800012
      001220122021000101220312222120020030121200212002301201201
      248464737403249615375144127496756916210327204834144847514
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 low high and a seasonal up period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "%R". It is giving a buy 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 has triggered a 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 $ 825. Use of options is not advised.


Historic Range

Scale traders are not a factor 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. Large speculators 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 an uptrend remains 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 Cl III September 16 Put and Sell (1) Milk Cl III September 16.75 Put @ 0.34 to the sell side or better .


o 1 o 2 o 5


Calendar Spread

What the Jul. - Dec. 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 up in the long run. The best time to enter or leave the above spread is when it is at -0.30 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -0.55 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be headed toward the buy the far, sell the near point.





Level Table:

Level Table

The path of least resistance is up.
 19.0|                                                                  R  5/11
 CME - Jul-18 Milk Cl.III, 200K lbs. c/lb    Cm.=0.01  Lim.= 0.8
     |
     |
     |
 18.5|_________________________________________________________________________
     |
     |
     |F
     |FF
 18.0|BFF______________________________________________________________________
     |BFFG
     |BFFFGGGG
     |BBFFFGGGGGGH
     |BBBFFFFGGGGH
 17.5|BBBBFFFGGGGGH____________________________________________________________
     |BBBBFFFGGGGHHH
     |BBBCCDDEEFFFFGHHHM
     |ABBBBBCCCDDEEEEEFFFGGHHLM
     |AAABBBCCCDDDDEEEEEFGGLLLLMM
 17.0|AAAAAACDDEEFFFGHHHJKKKKKLLMM_____________________________________________
     |AAAAAAACDEEFFFHHHHJJKKKKLLMMM
     |AAAAAACDEEFHHHJJKKKLLLLMM
     |CDEEFHJJJJKLLLLM
     |CCCCDEFJJJKKMM
 16.5|CCCDDEJJJJJKKMMNN________________________________________________________
     |DDDJJJJKMNNN
     |DDJKLMMMNNNNOO
     |DLMMNNNNNNOO[
     |MNNNNOZZ[
 16.0|MNNOOOOOZZZZ[[___________________________________________________________
     |MNNOOOOOOPYYZZZZZ   <<<
     |MNNOOOOOYY
     |NOOYYYYY
     |XXY
 15.5|XXY______________________________________________________________________
     |QQXXXYY
     |QQXXX
     |PQQX
     |PPQQQWWXX
 15.0|PPQQQWXXX________________________________________________________________
     |PPPPPPQQUWW
     |PPPPPPPPQQUWWWWWW
     |PPPPQUUUUUVVVVVW
     |QQUUUUUVVVW
 14.5|QUUUUUVVVW_______________________________________________________________
     |QQUUUUU
     |UUU
     |QQRSTTTTU
     |QQQQRRRSSSSTTTTTTU
 14.0|RRRSSSSTTTT______________________________________________________________
     |RSSSSTT
     |RS
     |RRS
     |RRS
 13.5|S________________________________________________________________________
     |
     |
     |
     |
 13.0|-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=-0.586
                           1 1 1 1 1 1 1                              
       5 5 6 6 7 7 8 8 9 9 0 0 1 1 1 2 2 1 1 2 2 3 3 4 4 5           5
       1 2 1 2 1 2 0 2 0 2 0 1 0 1 3 1 2 1 3 1 2 1 2 1 2 1           1
       5 6 2 6 1 5 8 2 6 0 4 8 1 5 0 4 9 6 0 3 8 4 8 2 6 0           1


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
                ________________________________

                     DAN8    July Class III Milk

                      High Price:  16.63
                   Current Price:  16.06
                       Low Price:  15.78

                            Risk:  0.035
                     Opportunity:  0.070

                    (O/R) Ratio =  2.036


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 0
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 3
Place 18 July Class III Milk on a Buy Watch with stoploss @ -0.69 below the get-in point when recent price is represented as "16.09".
____________________________________________________________________________________________________________________________________________B.D.