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Low Milk-Trade Volume Makes Hedging Harder

November 26, 2013
 
 


Art Schaap

Art Schaap

Clovis and Portales, N.M.

The Schaaps manage four dairies, including an organic operation, and milk 5,500 cows. They’re also partners in a cheese factory.

 


If puts, calls, fences, forward contracts, hedging and PPDs lock in a profit—good luck! I’ve heard horror stories of dairy farmers who lost their dairies, and those who have saved them, through marketing.

Unfortunately, those stories tend to be more bad news than good. I know of farmers who have locked in a profitable price, but the PPD took it all away.

As I write this, I was ready to use my forward-contract line of credit to lock in a percent of my milk prices. Prices were rising to a marginal profit. I talked to my banker and he told me to go for it. I called my broker and asked him to give me some options.

He forwarded me the information and I was ready to go. I proceeded to fund my account and was ready to pay for the puts and calls for a fence to lock in a bottom but give an upside. This was something that I could live with.

During all this readiness and due diligence, blocks dropped 7¢ in a day. All my preparations evaporated. The cheese trade of the day was: 0 trades, 0 bids, 1 offer left. My understanding of this trade is there was no trade! Only one offer left? How do we prepare and execute a marketing plan when cheese and commodities on the Chicago Mercantile Exchange (CME) are so volatile and so thinly traded? In this case, no trade.

We as a company are prepared and would like to market our milk through the CME but feel that it is extremely difficult and burdensome when there is no guarantee of a profit. It’s as if I’m gambling in a high-stakes poker game.

An area that we are successful with at the CME is our corn and grain purchases. We have done some contract caps with puts. This has allowed us to cap our top side, but it continues to benefit price decreases. On a monthly basis, we sell our puts. With the credit we receive from these puts, we pay our feed bill. Doing this, we are able to lock in our grain earlier in the year and receive benefit of the lower price.

Milk marketing and feed purchases are definitely two different camps. The number of corn trades on a daily basis can range from 200,000 to 400,000 trades. Milk, on the other hand, on a daily basis, is traded between 100 to 400 contracts.

I’m not telling you this because it’s something new; I’m just concerned about the volume of milk trades, which makes it harder to hedge our milk. We hope that dairy farmers can come together to fix our milk pricing by sorting through our regional differences.

We can’t afford to stand on the sideline and watch our prices come and go. We need to be involved in the input of prices that we are receiving. We are price takers, not price makers. I believe the dairy farmers in this country will unite!

Schaap’s recent prices

Milk

$18.30 (3.7 bf, 3.15 prt)

Cull cows

$68-$72/cwt.

Springing heifers

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