April 23, 2020

Innovation, Grit and Identifying Opportunities A Must

 |  By: Robin Schmahl

We certainly hope dairy prices will not follow the same path as crude oil with the front month May WTI contract falling to a record low of a negative $39.69 per barrel as traders liquidated contracts due to the end of the contract on Tuesday, April 21st. That is not a misprint. Crude oil futures moved below zero requiring a seller to pay for someone to take the oil if delivery is made. I have never seen any commodity market fall below zero. Oil storage worldwide is filling up and there is oil moving to refineries that do not want it. Demand has fallen dramatically. 

Some of this does sound familiar when compared to the dairy industry. Milk production is increasing seasonally into a market that has had demand disrupted due to the coronavirus. Not only the domestic market, but also the international market. Due to the disruption of the market as the food service and hospitality industry has been hit the hardest causing much shifting in the movement or lack of movement of product. Inventory is building as milk is being processed into storable products in order to utilize available milk. Extra milk has been and is being dumped. Plants are implementing requirements for dairy farms to cut back production by 10% to 20% in order to deal with the current supply demand situation. 

I do not predict it will follow the same pattern, but there could be some similarities. It is all up to demand and the ability of the industry to move product to that demand. 

USDA announced a $19 billion aid package to help farmers and ranchers as a result of the impact of low prices due to COVID-19. There is $16 billion earmarked for direct payments and $3 billion for the purchase of agricultural products to provide food for those in need. Of this $16 billion of direct payments, only $2.9 billion is earmarked for dairy. This is not very much when distributed among dairy farmers. There also is a cap to the amount of payments that will be received. The payment limit is $125,000 per commodity with an overall limit of $250,000 per individual or entity.

Anything will be welcomed, but it will not cure the current and longer term market disruption. It will take time and life will not be back to normal (whatever that is) for the foreseeable future. Much as we would still like to see a V-bottom to the economy, it will not happen. 

It will take innovation and grit to make it through these times. Agriculture will fare better than many other goods and industry over time as consumers will need to eat and you cannot eat durable goods that are not necessities. 

Milk futures are much lower than they had been a few months ago, but there is still opportunity to initiate damage control or to hedge some milk price further out that might be at cost of production. Utilizing marketing tools is important and always been important. Put options and put option strategies and well as the use of Dairy Revenue Protection insurance are the tools which make the most sense. Look for any opportunities that may be out there even though they are few at the present time.