Don’t Give Up on Futures Markets
Shoulda. Woulda. Coulda. That’s the best that can be said about dairy futures prices now through the summer months, at least. The scary part is, there’s no gua rantee stronger prices will materialize in the second half of 2016.
“We’re in a perfect triple storm,” says Chris Atten, a principal with Atten Babler, Galena, Ill. “China and Russia are out of the market, the European Union is up 5% in milk production, and the U.S. has 9.3 million cows with replacement numbers up 3%.”
There is some potential for markets to so en further. You might have to spend money for downside price protection to placate your lender and avoid $1,000-per-cow losses, he says.
Most Midwestern farms are likely sitting on a good pile of working capital, since it was fairly common to have at least a break-even year in 2015. “If they have $700 to $900 per cow in working capital, they should be able to get through the next six to nine months without too much of a problem,” explains Steve Bodart, principal business consultant and dairy industry specialist with AgStar Financial in Baldwin, Wis.
“Further east, we’re already drawing down working capital so solutions are much tougher,” he says. Even farms that had risk management plans in place aren’t seeing huge benefits.
“Marketing is only adding 20¢ per cwt,” Bodart notes. “Many implemented fence strategies [selling calls and buying put options] with big gaps, so the payoffs haven’t been large.”
In Idaho, milk prices were already at Class III levels this winter. Some producers were above the 32 April 2016 | $13 level, others below, depending on who they sold milk to and what funding formula the buyer was using, says Nick Buyse, with FCStone based in Twin Falls, Idaho. Given global markets, he doesn’t see things improving soon. “If we see a rally, it won’t be substantial—$ 16 or $17 is the high end of estimates for next year.”
It’s critical farmers understand what their cash fl ow needs will be this spring and summer, and talk to their lenders, broker and partners soon. That will give them time to restructure or refi nance loans, or go to interest- only payments.
“This is the time when the CFO takes over and drives the business through the next 12 to 18 months,” Atten says.