Trading

Today on the CME there was no movement on butter. Hoogwegt has been, for all practical purposes, the sole player in moving butter down by way of offers. Butter has fallen over 45 cents in the past seven days. Does Hoogwegt make butter? No. Is there too much butter? No. Is this the market at work? No.

On what might be considered a more positive note, Kraft has been an active player in moving the price of barrels higher. Wonders never cease.

Who Knows?

What is happening on the CME? Last week Kraft came and traded a few loads of cheese. Jerome, which might be simply following has sold the most loads. Mullins has traded a few loads. None of this answers the question of why? I think the following might be a key.

http://www.cnbc.com/id/38241893

More than 150 companies with market caps above $500 million that claim they have free cash flow—really don't!

That's the word from Ken Hackel, who wrote the just-published tome (and I do mean tome): "Security Valuation and Risk Analysis – Assessing Value in Investment Decision Making."

You should care, because free cash flow is the lifeblood of any company looking to grow.

And free cash flow was touted as a plus quite a bit in the recent round of earnings.

Hackel isn’t impressed. "The term 'free cash flow' has almost gotten to be like the old television show 'What's My Line',” he says. “What free cash flow should be defined as is the maximum amount of cash an entity could distribute to its shareholders without impairing its growth rate. Unfortunately, we've gotten quite a bit away from that."

The free cash flow definition most people use is operating cash flow minus capital spending.

But Hackel says that true free cash flow requires a lot more in the way of adjustments—the kind he believes most analysts simply do not do.

Among companies whose cash flow he believes are flashing red:

Kraft [KFT 31.12 0.04 (+0.13%) ], whose revenues missed estimates and which didn’t include a cash flow statement with its earnings release or discuss it on its earnings call. Still, using available information, Hackel believes he was able to analyze the cash flow and say, “Their backs are really against the wall; they have no room for expansion; they do not have financial flexibility."

Kraft disagrees, saying that over the past few years it has made excellent progress improving free cash flow. "In 2010, there are a number of puts and takes in the equation, due to the acquisition of Cadbury. However, on a more normal run-rate basis, we would expect cash flow to be north of about $3.5 billion.”

Kraft needs cash and it is OK with the government if the powerful take what they need from those with less power.

Near as I can find Hoogwegt (http://www.hoogwegtus.com/) offered the butter Friday and AMPI bought the load.
The seller does not make butter. The buyer does. Is that a real market? I think NOT.

Today, it appears that Dairygold bid the price back up 12 cents. Probably in an effort to protect the value of their inventory. Once again a producer of butter is bidding.

The 1996 study on the National Cheese Exchange repeatedly referred to "trading against interest" as a sign of market failure.

The election is over and it seems there was a clambering for less government. Is there anyone holding their breathe while the government contemplates the dairy trading on the CME?

Blocks Fall

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Block Cheddar fell today on the CME, three cents. The last time blocks fell was on June 28, 2010. Since then, blocks have risen $0.3725. The seller today appears to be Jerome Cheese. Jerome was also the seller on June 28th and since June 29th has not been active on the CME.

I spoke with someone today who said cheese is too high - there is a lot of cheese in inventory. I then asked if farm milk was too high and the answer was no.

As can be seen in the above graph, the fact that blocks drop for the processors, in no way means consumers will get great deals and use more cheese. If farm milk price drops, processors will just make more cheese from cheap milk. Comparing August 2010 cheese stocks with January 2009, shows a 17% increase in inventory - all produced with cheap milk.

There is no way that wholesale and farm milk price can be tied together and still pretend there is a market.

Political Power

(click on image to enlarge)

In 1961 John F Kennedy was in office, in spite of the fact that many people thought there would never be a Catholic President. Hope seemed to be in the air and milk prices transmitted efficiently from farm to the public.

In the above graph, I have once again combined the categories of dairy products published by the Bureau of Economic Analysis as "Personal Consumption Expenditures" (PCE). Then I took the "All Milk" price times the farm milk production. The results are a graphic representation of market failing to efficiently transmit price signals.

The difference, in the time period from 1961 through 2008, between farm and consumer value changed by just over 600%.