tariff
July 4, 2018

Is Your Milk Check Protected From Tariff Pain?

Top Story  |   |  By: Anna-Lisa Laca

Friday is the deadline for the U.S. and Chinese governments to come to an agreement before an entire menu of tariffs go into effect. While Agriculture Secretary Sonny Perdue has said on multiple occasions that the Trump administration will not allow farmers to bear the brunt of this trade conflict, analysts say there’s still plenty of downside in the market and farmers should take proactive measures while they still can. 

“What I hate about this conversation is that [producers] haven't already done something,” says Mike North of Commodity Risk Management Group. “We've talked about this risk at length over the course of the Spring, and the reality is, is that we had $17 markets staring us in the face a few weeks ago, knowing full well that their risk still existed.”

The risk of the market moving lower won’t go away until a deal is made with China, North says. 

“As we evaluate the last half of the year [Class III] is at $15.50, but July which is our new spot month traded below $14 last week,” he explains. “So that gives you a picture of what the risk looks like. Even at $15.50 there is risk to $14 or below. I'm hoping that doesn't become fully realized. But that's the risk, and it's undeniable risk.”

At $15.50 milk, North isn’t advising producers to sell futures, but instead he wants them to consider options strategies. 

“I want flexibility. I want to make sure that if suddenly, if we kiss and makeup, and everything is good with China, and we're back to doing business as usual, that, you know, we don't give up the top side at the same time,” he says. 

Brian Rice of Vault Technologies agrees the market is at a pivotal place. He says the market is facing a “binary choice,” meaning it’s either going to go drastically up or drastically down.   

“We're either in a trade war and prices are going to be horrendous, or we're going to not be in a trade war and we're going to potentially have a you know, maybe not a free trade agreement with China, but something maybe even better than what we had before,” he says. 

According to Rice there’s potentially more upside than downside risk from current levels, although he is quick to clarify there’s plenty of downside risk too. 

“It's just one of those things where it's not going to be gentle,” he says.

North advises producers to seek an options strategy. 

“Put options are at the tip of the spear,” he says adding that beyond that, strategy can vary based on individuals. Some people will choose to take a more aggressive approach than others, but bottom line, leave your top side open.

“The last thing you want to do is cut the top side completely. That would be a mistake,” he says. “If there’s a deal that comes out this week there will likely be a favorable response.”

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