Time To Establish a Marketing Plan
The dairy industry has gone through an extended period of low milk prices which has changed the way many farms have had to do business in order to survive. The improvement of cheese prices since the beginning of the year have effectively brought milk prices out of the hole that they had been in for 4 1/2 years. This is helping to slow down the number of farms exiting the dairy business. However, many have already quite milking cows leaving fewer farms to get out of the business. There remains sufficient concern that some farms are riding on the edge of remaining in business or exiting the business. Many farms are on interest only payments which results in no progress being made financially. The saying has been that for every year of low milk prices below cost of production, it take three years of good milk prices to regain the lost equity. Bearing that in mind, it would take 12 years to rebuild the equity that might have been lost during the extended period of low milk prices. This certainly is a frightening thought and one that needs to be assessed and steps taken to make a change.
The change that needs to be made is to implement a marketing plan to both establish a floor under your milk price as well as allow for the opportunity of capturing higher prices. I have spoken with numerous farmers that have expressed interest in setting up a marketing plan in order to protect their cost of production. However, much of that interest has waned over the past few months as milk prices have been improving. The need to protect milk prices suddenly changes to the desire to achieve the highest prices possible which is being viewed as not doing anything. The urgency gives way to the complacency. Unfortunately, this leads to a repeat of the process again the next time milk prices fall back and nothing has been learned and nothing is changed.
Do not get me wrong. I am not pointing fingers at anyone as I full well know the emotional aspect of the markets. No one wants to spend any extra money on something that they may not see a tangible benefit from initially. However, we must realize that we all do that when we purchase insurance of any kind. It provide protection and peace of mind, but many times we do not see a tangible benefit from it unless we have an accident or our home or barn burns down. That certainly is not what anyone wants, but insurance premiums are paid every year just as a precaution. The same is true for marketing.
Milk prices look more promising in the closer months, but not quite as promising for contracts in 2020. The trade is holding a significant price discount to later contracts in the belief that milk prices could set back once end of the year demand is filled, football season is over and consumers move into regular buying patterns again. I have seen this market inversion a few times in the past and it takes some time for this bearish attitude to be removed from the market. Stronger prices will need to hold or increase over the duration of a few months and in this case, hold into the first quarter of 2020 before a discounted market will be eliminated.
This adds to the apprehension of marketing for the coming year as it is very difficult to look at taking a hedge positons when futures contracts for next year are from $1.00 - $2.00 below the current prices. However, that is the purpose of a marketing plan. It identifies cost of production and the level that needs to be achieved to cover those costs as well as build equity. Then levels are set and strategies are formulated that will be implemented once futures prices reach those levels. I promote using options and option strategies to set a floor under prices which will leave your upside open. There is value in setting a specific price with futures or a forward contract and this will set a specific price providing you hard and fast numbers to work with which can be very effective. However, the volatility we have seen can be emotional and options may provide for less anxiety. Those who may not have the ability to set up a margin account with the lender due to a tight financial situation have the ability utilize the Dairy Revenue Protection program effectively due to it being subsidized and payment made after the chosen quarter has ended. The Dairy Revenue Protection program is an effective strategy for hedging for anyone as milk volume can be chosen and coverage can be chosen.
I cannot emphasis enough that utilizing the markets and hedging is just as important as any other aspect of the farming operation.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at .