June 5, 2017

Don’t Bet the Farm on Higher Milk Prices

 |  By: Robin Schmahl

Dairy prices may be higher than many had anticipated during this time of year and lower than many would like, but there certainly is no lack of volatility. Underlying cash prices have been all over the place with traders guessing which way the market will move on any given day and then trying to keep up with the actual movement. The result of this is the statement that I have heard many times which is, “This market is so hard to guess direction so I am just not going to do anything to protect milk price”.

What is really being said is that the person wants to pick the top of the market and then step in and hedge milk prices, speculating that this will be possible. As long as there is volatility of underlying prices such as we have had, it does not indicate a top and as such there is a potential for prices to move higher. That assessment certainly is correct in that there is potential for prices to increase when there is not a definite trend lower.

Now, I am not indicating that a person should be hedging indiscriminately without assessing the market, but it behooves a producer to be aware of the fundamentals affecting price movement. Those fundamentals can change and sometimes rather quickly. Most often historical prices and market movements are used to analyze and predict market potential. That is the reason many traders in all markets use technical analysis. There are historical patterns and studies that aid in guessing futures price movement. The reason technical analysis works is that there are many traders using them and the more that are using and following them, the greater that chance of correct assessment of price movement.

The main point here is that each individual farm needs to know what price is needed to cash flow and then decide what marketing strategy could be implemented to protect that price and at what level.  It may be that an option or option strategy would be implemented when contract prices are providing an opportunity to establish a price floor above costs allowing the upside to remain open to capture a higher price if it develops. Futures prices that are substantially above costs may allow for other strategies that might be more aggressive. One needs to be respectful of the market as well as reactive to the market.

Marketing is not easy, but it is necessary. I do not mean that you need to be in the market all of the time and hedging all of your milk all of the time, but the effort of developing a marketing plan is essential. It allows one to react when certain prices are achieved. There is no other business involved in the production of a commodity that will put their business on the line and ride the volatility wave never knowing the price they will be paid until after the product is shipped. What if a car manufacturer would sell a vehicle one year for $25,000 and the next year have to sell the same vehicle for $15,000 while still paying expenses for raw materials and labor costs? They would not be manufacturing cars for very long. Yet, many farmers do this every day and every year. Milk gets picked up or delivered depending on the size of your operation with payment rendered a month later. The aspect of getting paid a month later is that the price for milk is not known until the final milk check arrives. Then the bills are paid with whatever is available in the bank account. Many farmers put seed in the ground when prices are profitable only to hope the price for that crop will remain profitable until it is harvested and eventually sold. This can be a very anxious and stressful situation and may sometimes cause sleepless nights.

Marketing can also cause sleepless nights as well. One may ponder which strategy to use or the realization that upside price opportunity is being giving up. However, if a marketing plan is well thought out and implemented with goals being met, there is comfort in knowing that it will be a good year and equity will not be at risk of eroding.

The market situation we are currently faced with has a tendency to cause farmers to become complacent as it appears better milk prices will be realized this year. We certainly hope milk prices will improve more than what they already have. The average Class III price for the first five months of this year is $2.52 cents higher than the same time last year with Class IV $1.86 higher. However, we must not bet the whole farm on what is happening at present as markets can change.