03-16-2019: April Milk (Class III): Selling Below Cost of Production

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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

01     4

5     6
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2


Introduction

3 Milk prices are very subject to political winds (government subsidies) and trade relations. Both have been pretty poor under the Trump Administration for dairy farmers, but they constitute a substantial portion of Trump's "base." The Sec'y of Agriculture counsels dairy farms to "hang in there" waiting for summer for Congress to act on price guarantee programs while current ones already somewhat favor famers at this stage. The cost of production is well above current wholesale price of milk, and many farms are going out of business. It seems almost certain the U.S. Government will have to act soon to offset its ruinous policies that have destroyed many dairy farmers. Our technical indicators suggest milk futures are somewhat "reactive" in nature, and a recovery bounce may already be starting. However, a warning can be seen from historical milk prices, where at present we are only in the "middle" portion of them showing milk prices do have a potential to go much lower if the past is any indication. Our "trust factor" in the current U.S. Government is at a low point, but even the worst administrators should realize the ruinous policies up until now have severely damaged the entire U.S. agriculture industry and made exports much less competitive. The big question is whether or not our government will act in time.


Intermarket Analysis

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




Parabolic Chart

April Milk (Class III):

Parabolic Chart


Nirvana Chart

April Milk (Class III):

Initial Chart


News Analysis

Licensed dairy farms are going out of business in ten states with Wisconsin the worst, losing 590 dairies. It was followed by Pennsulvania and New York State. A total of 650 more were lost between those two states alone. With them were lost dairy herds. 2,700 farms were recently lost in total nationwide. The current Administration seeks to replace the North American Free Trade Agreement with the USMCA Agreement. However, it still has yet to be ratified. It will probably take until the middle of summer for lawmakers to ratify this agreement. There may not be enough votes to make it pass. Early in the NAFTA renegotiation process, President Trump placed steel and aluminum tariffs on Canada. This caused a lot of damage in trade relations and damaged export markets for U.S. milk. The administrator of the U.S. Dept. of Agriculture said rmoving tariffs and ratifying USMCA is incredibly important for agriculture. There are $80 billion worth of agricultural products circultating between the three countries, U.S., Canada, and Mexico. The closer we get to fall and the next election cycle, the worse the chances for passage seem to become.

There is something in the dairy industry called the "Dairy Margin Coverage" (DMC) program in which farmers could enroll. A level below $8.00 to $9.50 in the price of milk / feed margin triggers government subsidies to make up the difference. In December this margin reached $7.85, triggering a $0.15/cwt support payment. Operations making a one-time election to participate in DMC coverage through 2023 are eligible for a 25% discount on DMC premiums. A previous corresponding "Margin Protection Program" ended in December. There is an "alphabet soup" of government insurance programs available to dairy farmers beside the DMC. They include the Market Facilitation Program (MFP), the Dairy Revenue Protection (DRP), the Livestock Gross Margin-Dairy insurance program (LGM), and no restrictions on the multiple use of these programs. So the milk industry is highly regulated with price controls of various forms. For DMC< the new $9.50 coverage level for the first 5 million pounds of a dairy farmer's production replaces the old $8/cwt level.

USDA Sec'y of Agriculture Sonny Perdue said, "Milk farmers just have to hang on. Everything has to go by rules, rules, rules in Washington, D.C." The milk sector suffered most under previous programs. Milk predominates just about everything else in any impending Farm Bill.

There is an effort in Congress to get the word "milk" taken off non-milk plant-based products. It is considered unfair mislabeling of non-dairy products on such things as milk, yogurt, and cheese made from nuts, seeds, plants, and algae. Because of lobbying efforts by large firms, a push for this legislation has been unsuccessful in the past. The "Dairy Pride" Act passages is considered critical by senators from Wisconsin and Idaho.

January milk production was up about 0.9% in January nationwide.

Milk futures prices have been trending higher driven by strength in Cheddar cheese blocks and Barrels. A large amount of butter was produced nationwide, up 4.2% from January in February. Total cheese production was up .4.2% from January and 10.4% above December's large production. Non-fat Dry Milk was up 7.7% from last year but Skim milk powder production fell 33.5% from January in February.

Thousands of "Almond Breeze" milk cartons were recalled for containing actual dairy product in them, which could trigger reactions in some individuals. "Organic milk" consumers have beenr reported "duped" by certain milk sellers in England.

One source says feed costs are about 48% of the cost to produce milk. Non-feed costs per cwt of milk produced are around $9.79. By our calculations, that would suggest a total cost to produce milk at around That would suggest to us, if figures are accurate, that 9.79 / 0.52 would be the actual cost to produce milk at $18.81, far above the current futures price of $15 .09. This suggests the effect of government subsidies is critical.


Point & Figure Chart

 24.0|                                                                  R  3/15
     | CME - Apr-19 Milk Cl.III, 200K lbs. c/lb    Cm.=0.01  Lim.= 0.8
     |
     |
     |
 23.0|_________________________________________________________________________
     |            X
     |            XO
     |            XO    X X           X
     |            XOX   XOXOX         XO
 22.0|____________XOXOX_XOXOXO____X___XOX______________________________________
     |            XOXOXOXOXOXO    XO  XOXO
     |            XOXOXOXOXOXO    XO  XOXO
     |            XOXOXOXOXOXO    XO  XOXO
     |            XO OXO O O O    XOX XO O  X
 21.0|____________X__OX______O____XOXOX__OX_X__________________________________
     |          X X  OX      O    XOXOX  OX X
     |          XOX  OX      O    XOXO   OX X
     |          XOX  OX      O    XOX    OX XO
     |        X XOX  OX      O    XO     O OXO  X
 20.0|________XOXO___OX______O__X_X________OXO__XO_____________________________
     |        XOX    OX      OX  OX        O O  XO
     |        XOX    OX      OXO OX          O  XO
     |        XOX    OX      OXO O           O  XO
     |        XOX    O       OXO             O  XO
 19.0|________XO_____________O_______________O__XO_____________________________
     |        X                              OX XO
     |        X                              OXOXO
     |        X                              OXOXO
     |  X   X X                              O OXOX
 18.0|__XO__XOX________________________________OXOXO___________________________
     |  XOX XOX                                OXOXO
     |X  OXOXO                                 OXOXO
     | O OXOX                                  OXOXO
     | O O OX                                  OXOXO
 17.0|_O___OX__________________________________OXOXO___________________________
     |     OX                                  O O O
     |     OX                                      O
     |     OX                                      O
     |     OX                                      O
 16.0|_____OX______________________________________O___________________________
     |     O                                       O
     |                                             O
     |                                             O
     |                                             OX
 15.0|_____________________________________________OX__________________________
     |                                             OX
     |                                             OX
     |                                             OX
     |                                             O
 14.0|_________________________________________________________________________
     |
     |
     |
     |
 13.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
      1               1111                 11111   1
      21113456666778990222112233444677788890012216802
      10122220012002001011010022002002301221201110002
      46401167849575689525981717364734131357414885945
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 weak seasonal up period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "WilderRT". It is giving a buy signal.

Internal Printout 1

Results of "WilderRT" for Milk (blue lines = successful trades, red, unsuccessful): (Not always in the market.)

Results


Third System Confirmation

Our third system is working on a longer-term buy 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 $358. 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. Except for a small blip in the latest data, 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 a change in major trend to up is imminent near a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Milk Cl III June 15.25 Put and Sell (1) Milk Cl III June 15.50 Put @ 0.11 to the sell side or higher.


o 1 o 2 o 5


o 3


o 4


Calendar Spread

What the Apr. - Dec. 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 in the long run. The best time to enter or leave the above spread is when it is at -1.04 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -1.65 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

This appears to be a rare instance where the two methods we use do not agree with each other. The preferred method suggests the path of least resistance is up.
 21.0|                                                                  R  3/15
 CME - Apr-19 Milk Cl.III, 200K lbs. c/lb    Cm.=0.01  Lim.= 0.8
     |
     |
     |EEEFF
 20.0|EEEEFF___________________________________________________________________
     |DDDDEEEFF
     |CCCCDDDDDDDFFFF
     |CCCCCFFFGG
     |BBCG
 19.0|BBBBCG___________________________________________________________________
     |BBBGG
     |AAABGG
     |AABG
     |AAAAAGMMMMN
 18.0|GGMMNNNNOOO______________________________________________________________
     |GLLLMMNNNNNNNOOOOOO
     |GHLLMOP
     |GHHHHLLLLMMPPPP
     |GHHHKKKKKKKKLPPPPP
 17.0|HHJJJJJJJKKKKQQ__________________________________________________________
     |HJJJQQ
     |HHJJQ
     |QQQQ
     |QQRR
 16.0|QR_______________________________________________________________________
     |RRSS
     |RRS
     |RRRS
     |SYZ
 15.0|SSSSVVVYYZZZZ____________________________________________________________
     |STTUUUVYZZZZ[[
     |TTTTUUUUUUUVVVVVXXYYZZZ   <<<
     |TTTVWWWWWXXXYYYYY
     |TTWWWWXXXXYY
 14.0|WWXXX____________________________________________________________________
     |
     |
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     |
 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= 1.000
                                   1 1 1 1 1 1                        
       3 4 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 2 2 1 1 1 2 2 3           3
       1 0 1 3 1 2 1 2 1 2 0 2 0 2 0 1 0 1 0 1 0 1 3 1 2 1           1
       9 2 6 0 4 9 2 6 1 5 8 2 6 0 4 8 1 5 3 7 2 6 0 3 8 4           5


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 3/14 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                  DAJ9    April Milk Class III

                      High Price:  15.67
                   Current Price:  14.88
                       Low Price:  14.49

                            Risk:  0.052
                     Opportunity:  0.105

                    (O/R) Ratio =  2.026


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 + 5
Place 41 April Milk (Class III) on a Buy Watch with stoploss @ 0.57 below the get-in point when recent price is represented as "15.09".
____________________________________________________________________________________________________________________________________________B.M.