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eDollars & Sense

RSS By: Dairy Today: eDollars and Sense, Dairy Today

Dairy Today’s Dollars & Sense producer contributors tell it like it is on their dairies.

Ready to Contract Milk

Nov 15, 2010

I now realize that you can't be in and out of contracting. You must be constantly playing the market. Sometimes I am going to hit it right and sometimes I will not. However, by booking milk, I will know what I am going to be paid.

Zach Myers 2009By Zach Myers, Jonesville, N.C.       

Myers Dairy, in the Appalachian foothills, is home to 830 Holsteins and 700 replacements.
 
There are several risk management tools available for dairy producers to take advantage of today. Forward contracting of commodities has been around for a long time. Recently, my cooperative has given us more options. Previously I could only contract a Class I price.
 
I now have three options: 
 
1. I can still contract a Class I price.
2. I can purchase a minimum Class III price.
3. I can purchase a minimum and a maximum Class III price. 
 
I can book up to 80% of my historical production with all three of these options.
 
In the past, I have done some Class I forward contracting. I would say that overall I have broken even. The last time I booked milk, however, I ended up booking at the wrong time and lost some opportunity when the actual Class I price rose above my contract price. Since then, I have been reluctant to book a Class I price.
 
I now realize that you can’t be in and out of contracting. I believe you must be constantly playing the market. I understand that sometimes I am going to hit it right and sometimes I will not. However, by booking milk, I will know what I am going to be paid, and I can plan my management accordingly. This, I hope, will take some of the volatility out of the market for me.
 
Both options of booking Class III price are attractive to me. These options have just become available through my cooperative in the last month. Contracting only a minimum is more expensive, but you don’t give up the upside, whereas, by contracting a min/max, you save money, but you possibly give up opportunity if the Class III price moves higher than the max.
 
I plan on contracting milk starting next year. I am now in the process of researching what price I need as a minimum in order to break even. My first question: How does the Class III price relate to my actual pay price? I am in the Appalachian Federal Order, which has a high Class I utilization, so my gross price is some figure more than the Class III price.
 
I went to my Federal Order’s web page and got the last three years’ announced Class III prices. I then went through my last three years of records and got my gross price and determined an average difference. By doing this, I can make a more educated guess as to the Class III price I need to break even. Wish me luck!
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