milk
February 12, 2018

History Should Help Marketing

 |  By: Robin Schmahl

Hindsight is always 20/20 as one can see where the market has been. The feeling is then one of “could have/should have/would have” or one of “I am glad it didn’t”. Hindsight marketing does not always pay the bills as we certainly are seeing this year and for that matter, the past few years. Many times the purpose of marketing is lost in the idea that it only works if one can make money. If it does make money, then it does not work. This idea is generally limited to the money balance in the hedging account. However, the success of marketing in no always the balance in the account, but the balance in the checkbook and the equity in the dairy operation.

A hedging account may show and decline in value if options have been the method of price protection, but that does not mean you are losing money. It means milk prices are remaining higher than you chosen level of price protection which means more income on you milk check. Options are an insurance policy protecting a floor and allowing to take the advantage of higher prices. So, losing money on option positions is a good thing. If those option positions are gaining value, milk prices are declining and that is not a good thing unless you have 100 percent of your milk production covered.

Futures and forward contracting with the milk plant must be done at a price that is profitable and a level that one is satisfied with. If the market then increases, upside price potential will not be realized, but cost of production is covered and bills will be paid and equity is protected.

Many times, dairy farmers will say that there has been no opportunity to protect prices over the past year or so. That is when we can look back to see what took place and what opportunities were there in order to provide some guidance for futures marketing decisions.

One thing we can do is look at the big picture back to 1980 to see what the average Class III milk price has been. This may not be an accurate picture on recent market volatility and fundamentals, but it is important all the same. The average Class III price has been $13.48. Then, we need to shorten that window to maybe get a bit closer to the recent market environment. The 10-year average for Class III prices has been $16.62 with the 5-year average at $17.43. Again, looking at the 5 and 10-year averages compared to last year one could say that there was little opportunity for price protection.

In 2017, the average announced Class III price was 16.17. The average contract high of Class III futures in 2017 was $17.89. Highs ranged from $17.53 for the December contract to $18.08 for the March contract. Futures prices remained above the average price for a period of time in those contracts that traded that high allowing for ample time to initiate positions at those levels. All futures contracts in 2017 spent time above $17.50 allowing ample time to initiate futures, forward contracts, or option positions above that level. This would have made a huge difference to your dairy operation. However, the key is to establish a cost of production and develop a marketing plan that has predetermined levels at which price protection needs to be implemented. Market fundamentals and outlooks both domestic and internationally will then dictate which strategy to use. As we can see, marketing is not an option, it is a necessity. It is just as important as anything else you do on your dairy farm.

 

Upcoming reports:

  • January Milk Production report on February 21
  • January Cold Storage report on February 22
  • January Livestock Slaughter report on February 22
  • March Federal Order Class I price on February 22

 

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed.  Any opinions expressed herein are subject to change without notice.  Hypothetical or simulated performance results have certain inherent limitations.  Simulated results do not represent actual trading.  Simulated trading programs are subject to the benefit of hindsight.  No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.  There is risk of loss in commodity trading may not be suitable for recipients of this publication. This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.