May 29, 2019

Protect Your Feed Bill Against Rising Commodity Prices

 |  By: Mike Opperman

Just when milk prices started to improve, the rains came and turned the spring of 2019 into the wettest on record. That’s driven up commodity prices and delayed first-crop hay harvest in much of the country. As of the end of the day Tuesday corn prices were 70 cents higher than contract lows and soybeans were following their lead. 

“We have a wave of speculative buying that has rolled into the market,” says Mike North, president of Commodity Risk Management. “Everybody and anybody is coming to buy corn.”

With so many speculative buyers, any information on planting intentions or acreage will impact market moves. Moving ahead, any concern for more acre losses or declining yields will have a significant impact on the market.

“If those concerns grow, you’ll see this market move into a discount carry structure,” North says. “Meaning the nearby contracts will carry more value than the deferred contracts. Every scarcity market moves in that direction and that’s what we would expect if the delayed planting story becomes an even bigger deal.”

Realize that this is just the first chapter in a long growing season. Summer weather is more indicative of the final yield outcome than spring weather, North says. Fortunately, for the sake of the crop, it looks like the El Nino pattern will be strong this year, which indicates a very mild summer and fall. However, we might lack the ideal growing degree days to facilitate higher yields, he says. 

Any increase in corn and soybean prices has a direct impact on feed costs. 

“Every $1 change in corn directly adds $0.50 per cwt to the cost of producing milk,” says Nate Donnay, director of dairy insight with INTL FCStone. “And since feed ingredient prices are typically correlated, a $1 increase in corn prices probably adds about $1 total to the cost of producing milk.” 

Many producers forward contract grain and likely already have at least a good portion of their feed needs locked in. But for those who will need to purchase grain or other commodities, steps need to be taken to protect against upward price movements. 

“Book feed, then buy puts,” North says. “Get your hand on physicals and then buy puts to defend that position.”