Know Your Market
Price Milk Incrementally Now to Avoid Regret
Aug 10, 2012
When milk prices eventually do descend, you don’t want to be among those who are scrambling to take a position.
By Mark Ludtke, Stewart-Peterson
The Summer Olympic Games have been a nice diversion from watching the weather maps and the sky for rain clouds. It always amazes me to think about the discipline those athletes have years before an Olympic event, so that they can perform under pressure and top a previous “best.”
Yes, there is a parallel to your dairy business here. And it has to do with how you handle the pressure of making pricing decisions.
Most of the discussions I am having with dairy producers this summer revolve around whether or not they should take any action to protect their milk price when feed prices are so high. They like the idea of some protection in place, but some can’t bring themselves to take action because there is much news out there pointing to higher milk prices. The culling pace is picking up and, with higher feed prices, it logically follows that production will drop off and support the milk price.
That may be true in the near term. We see reasons, however, to be cautious that milk will hold.
First of all, the nature of the rally is supply-driven due to the heat and lack of feed. The wider economy is not strengthening, so once prices get to a point where demand drops, we’ll see a pull-back.
Second, from a technical perspective, whenever corn prices have been high, it has historically been a good time to price milk. The chart below illustrates this. When corn prices start to fall apart, milk prices tend to start falling as well.
And so, when milk prices eventually do make a turn lower, you don’t want to be among those who are scrambling to take a position. Rather, as the milk price is rallying, we want to incrementally take something from each step up. And, as we reach certain levels, we want to have a downside safety net in place. Put options are a good choice, because they set a minimum price while keeping the topside open in the event that prices keep moving up.
Consistent and disciplined incremental pricing is part of an overall strategy that, like those training for an Olympic race, has you prepared for any given moment. An athlete who doesn’t train in a disciplined and consistent manner risks injury or misses the opportune moment. We encourage you to adopt a training program that has you consistently working toward your own “personal best.” In running, time is your measurement of success. In marketing, it’s your weighted average price received for milk (or paid for feed) for a quarter, year or three-year period.
With consistency, discipline and strategic creativity, you can gradually work to raise that weighted average price for milk, and lower it for feed. Last month I wrote about the enviable position of producers who had protected their corn price earlier in the year. Those who did not act at that time are struggling now. We don’t want to see that same regret happen for those who hesitate to start pricing their milk.
As with any training program, you have to start somewhere. There is no external news or authority that is going to tell you that now is the time to act. It has to come from you deciding that you want to begin a disciplined and consistent program that always drives toward achieving a new “personal best” for your operation.
Mark Ludtke consults with dairy producers nationwide concerning their choices for risk and opportunity management. He can be reached by calling 855.334.0700 or at firstname.lastname@example.org.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.