Buy Puts?

11:53AM Dec 11, 2008
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With the cheese market in flux, and butter and powder markets in freefall, dairy producers might want to consider putting a floor under their milk prices this spring by buying put options.
So says Bob Wellington, dairy economist for Agri-Mark, Lawrence, Mass.
While milk supply increases seem to be slowing and yesterday's Cooperative Working Together program announcement of 61,000 cows destined for culling, consumer demand for dairy products is still a concern. "We could see domestic demand fall one to two percent in 2009, and international demand could fall 2% to 3%,” he says.
With milk supply increasing 1% and demand decreasing overall 2% or 3%, that means the U.S. could have 3% to 4% too much milk clogging domestic market channels. That's bad news for dairy markets. "And markets always over-react, both on the upside and downside,” says Wellington.
"I'm looking at a $14 milk price for Central New York this coming year, but there is nothing there to really stop it from falling to $11 or $12,” he says, given the market's propensity to over-react.
Decreasing feed prices in the last few weeks could also cause the pain to go on longer. Western producers, many of whom rely on purchased feed, have likely seen their breakevens fall significantly as corn and protein prices have declined. That will allow them to stay in operation longer than they would have with the higher feed costs.
The federal government's stimulus package for the economy also could cause labor issues for farms. If money is poured into road and other construction projects, those resulting jobs could attract labor off of dairy farms that is skilled in operating heavy equipment, he says.