Locking in a Windfall Profit on Your Feed
Nov 08, 2010
Too many factors influence the price of feed ingredients to be able to predict with any certainty where they are going. Don’t try to be a speculator in the feed market. We’ve got enough inherent risk in the dairy business.
I’ve seen it time and time again: dairy producers and their advisors relying on market analysts, USDA reports, other dairy producers, hunches or crystal balls to try to lock in their purchased ingredients at the lowest price. Sometimes they’re lucky, but just as often they wait for prices to go lower, only to watch them turn north until they’re past the breakeven price.
Look at what happened this past season. Corn prices were very favorable but predicted to go lower due to excellent growing conditions. Then the USDA yield reports started to come in lower than expected, and the good prices vanished quickly. And they took the rest of the market with them.
Now we’re also watching as cotton prices go to record highs due to unforeseen global conditions. So, alfalfa growers in the Southwest are ripping up alfalfa fields as fast as they can to plant cotton. The result? Dairy producers are quickly bidding up the limited alfalfa hay. The reasonable prices we were enjoying for alfalfa hay a couple of weeks ago are gone as quickly as the Democrats on Nov. 2.
Times have changed. There are just too many factors influencing the price of feed ingredients to be able to predict with any certainty where they are going. Global demand, global weather conditions, government mandates like ethanol and other support programs, speculators, currency values, you name it -- they all affect our feed prices. Leave the gambling to the speculators. We’ve got enough inherent risk in the dairy business.
Since I don’t have a crystal ball, I’ve always advised my clients very simply to “lock in a live-with price,” but “never book a bad buy.” Don’t try to be a speculator in the feed market. And don’t panic if prices are running up quickly by locking in an unprofitable ingredient. Rather, look at it as a dairy producer trying to make a reasonable profit selling milk. Even this simple advice can be difficult with variable milk prices. So basing feed purchase prices on conservative milk prices or hedging your milk will give you added confidence for your decisions.
A “windfall profit” is defined as “money received unexpectedly.” This should not be a basis for a sustainable business model.