01-16-2010: January Milk, BFP: Forces Zenith to Go Electronic
The wake-up call for Zenith comes from Milk. Perhaps this commodity, more than most others, shows the difference between floor exchange price swings and volume and electronic price swings volume. Increasingly, exchanges are going to electronic trades, but Zenith has been obtaining data provides only open outcry floor trades. The difference between the two is illustrated within this article in places below like "Nirvana Chart" which is based upon floor trades and the "Parabolic Chart," which is based upon floor + electronic trades and is continuously forward-adjusted (whereas our data is discretely occasionally forward-adjusted.) For purposes of prediction, we don't think this has had a major effect on the outcome, but for purposes of smooth charts versus spotty ones, this has become a problem for us. The exchanges are in a mess right now as they switch things around, and one is never quite sure what one is looking at. For example, some commodities like Feeder Cattle have not gone to electronic trading at all. Other commodities like Soybean Oil have gone to electronic trading but have more action from the floor traders. However most commodities, like milk, that have gone to electronic trading, have more action on the electronic side. Keeping up with this is horrendous, and has probably cost the exchanges considerable trading volume from small traders. They can't seem to make up their minds on what to do, and the Chicago Board of Options Exchange is the latest group to "mastermind" a switchover that will be sure to confuse everybody for a while despite the fact they claim it is a "simplification."
We've decided we have some of the best data available, but it has been mis-used by us. Therefore, our management has decided to come up with a program to filter through the data looking for electronic exchanges where they exist, and use the data from them, but to retain floor exchange data when electronic data is not available. Whether we will go back and correct previous data is another matter, but in three more years or so, it won't make any difference, so we will probably live with our mistakes.
January Milk, BFP:
January Milk, BFP:
Butter futures have been jumping higher, pulling milk futures
along with them of late. Butter inventories in November were
down 25% from October. Cheese prices have been mostly steady.
While milk futures contracts have been popular in the United
States, the Netherlands plans to start up Europe's first milk
futures exchange. The European Union formerly regulated milk
prices but as they come under deregulation, they are expected to
fluctuate more highly. Brussels is also mulling establishing
dairy futures to help make prices more transparent.
Reductions in the U.S. dairy herd may erase a surplus that sent
prices to a six-year low for Milk, according to the University
of Missouri.
Projections by South Dakota State University show mnilk futures
climbing above 16.00 this coming year.
The USDA announced a Dairy Economic Loss Assistance Program, ("DELAP")
which will pay a 100-cow dairy fram that produced one million
pounds of milk for six month period from February to July,
$6,400 in one lump sum. The maximum payment under the program
is $19,200.
Milk production in November, 2009,for 23 major states was 14.0
billion pounds, down 1.0% from last year. October was down 1.2%
from a year earlier. Milk production per cow increased 15
pounds above November 2008. November dairy cows were 209,000
head less than a year ago, and 6,000 less than October.
Dairy farmers are being encouraged to buy call options to
forward price their milk production.
Downturns in milk futures prompt farmers tl well before prices
move lower. The USDA is bullish and raising price forecasts
because improved domestic demand and lower year-to-year milk
production is expected to lead to higher prices.
A very late harvest pushed up the prices of feed grains, which
could impact the profitability of dairymen in 2010. Farmers
harvested just 37 percent of the corn crop this season compared
with 82 percent at the same time the previous year.
J.M. Smucker, Kraft, and Starbucks have all said higher milk
costs have impacted their earnings.
Milk cooperatives offer agreements to a forward price on a set
volume of milk at a price below the futures price available on
the CME.
Milk reached record low prices in 2009, and sold for below cost
of production. Farmers are trying to convince the Federal
Government of change the way milk is priced. Dairy farmers are
paid a commodity price that doesn't factor in their cost of
production. On average, farmers lost $1,000 per cow in 2009.
Prices got as low as $11.30 per hundredweight in 2009. Two oy
years earlier farmers were receiving $21.30 for milk. Farmers
are used to fluctuations in the price of milk, but recent low
prices were sustained longer than usual.
In Arizona, efforts by localities to annex dairy farms to get
rid of them suffer from a state law that prevents dairies of
more than 20 acres from eniment domain. That is why parts of
greater Phoenix and other Arizona cities stink so much.
Senator Ben Nelson of Nebraska has been busy getting not only
Medicare payment exemptions for Nebraskans, but also $22.6
million in major loan guarantees from the Federal Government for
two Nebraska businesses. Prarieland Foods, LLC received a
substantial part of this for dairyland operations. To get the
$787 billion stimulus bill, Nelson is one of the chief
earmarkers of pork barrel blackmail for his vote.
Despite problems noted here, we rate the news for milk
as good because of USDA projections for $16.00+ milk prices
in 2010.
16.0I R 1/13
I CME - Jan-10 Milk BFP, 200K lbs, c/lb. Cm.=0.01 Lim.= 0.4
IXOX X X
IXOX X XO
IXOX X XOX
15.8IXOXOX_________XOXO_______________________________________________________
IXO OX XOXOX
IX OX X X XO OXO
IX OX X XOX OXO
IX OX XO XOX OXO
15.5IX__OXOXO_O__XO___OXOX_X__________________________________________________
IX OXO O OX X OXOX X
IX OX OXOX OXOX X
IX OX OXOX O OX X
IX OX O OX OX X
15.3IX__O_______OX______O_OXO_________________________________________________
IX OX OXO
IX OX OXO
IX OX OXO
IX OX O O
15.0IX__________O___________O_________________________________________________
IX O O
IX O O
IX O O
IX O O
14.8IX__________O___________O_________________________________________________
IX O
IX O
IX O
IX O
14.5I_______________________O_________________________________________________
I O
I O
I O X
I O X
14.3I_______________________O__X______________________________________________
I O X
I O X
I OX X
I OX X
14.0I_______________________OX_X______________________________________________
I OX X
I OXOX
I OXOX
I O OX
13.8I_______________________O_O_______________________________________________
I O
I O
I O
I O
13.5I_________________________________________________________________________
I
I
I
I
13.3I_________________________________________________________________________
I
I
I
I
13.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
1 11111 1
112255666778911222111234790
000202013010001001002010300
746269610275450381573261142
Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for Milk. Therefore, the above chart is taken as giving a sell signal.
We are headed toward a cyclical high with no seasonal tendency.
Our best-performing internal program is "WilderRT." It is giving a buy signal.
Results of "WilerRT" for Milk (blue lines = successful trades, red, unsuccessful): (Not always in the market.)
Our third system is working on a longer-term sell signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $2,000. Initial margin on a single contract is $2,106. Use of options is advised.
Scale traders are not a factor in this price range.
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. Red is small speculators. Green is large speculators. Blue is commercials. Commercials with the best track record are starting to get increasingly-long.
The average volatility shown below suggests that a major change in direction to down is imminent at a volatility low point.
Our option trade recommendation is to Sell the BFP Milk Class III April 15 Put @ 0.87 or better.
What the Jan. - Mar. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down. The best time to enter or leave the above spread is when it is at -0.10 or narrower selling the near as prices are falling and then buying the far, and exiting or entering when it is at -0.80 or wider buying the near as prices are rising and then sellling the far.
Here's an intraday chart for the previous day ( 1/13 ).
Risk Versus Opportunity Report
________________________________
DAF0 January Milk
High Price: 14.72
Current Price: 14.4
Low Price: 14.24
Risk: 0.022
Opportunity: 0.044
(O/R) Ratio = 2.000
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | - 1 |
| Nirvana Chart | + 1 |
| News | + 1 |
| Point & Figure | - 1 |
| Cyclicals | + 1 |
| Seasonals | 0 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | + 1 |
| Commitment of Traders | + 1 |
| Historic Range | 0 |
| Range/Volatility | - 1 |
| Level Table | - 1 |
| Other Factors | - 1 |
| Total | + 1 |
Place 14 January Milk on a Buy Watch with stoploss @ -0.26 below the get-in point.________________________________________________________________________________________________________D.A.
