Lock In Margins Early

June 11, 2012 10:45 AM
 

Dairy producers complain that current futures prices often don’t offer a reasonable margin. And they’re often right.

 
The mistake producers usually make, says Marin Bozic, an assistant professor of Dairy Foods Marketing Economics at the University of Minnesota, is that they don’t look far enough into the future. “If you protect your margin between nine and 12 months to contract maturity, you will likely obtain a [milk-feed price] margin between $8 and $10/cwt,” he says.
 
“In fact, ever since the spring of 2005, there was never a contract that would not allow you to lock in an $8 margin at some point during the nine to 12 month-out period,” he says.
 
He also notes, however, that corn and soybean futures may not always be the best tools. While they are indicative of prices, cash based contracts designed to meet you specific needs might be best.
 
His take-home messages:
 
• If you hedge, do so on both feed and milk sides.
 
• If you want consistently stable margins, you need to hedge nine to 12 months before the contracts are scheduled to expire.
 
• Hedging is not a substitution for modernization and efficient production.
 
“As more and more large dairy farms are built, average margins will likely get tighter,” he says. “Those tighter margins are something you cannot hedge against, no matter how early you try to lock in the margin.”
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