Researching my story "Market with Discipline,” page 20, taught me a lot about protecting future milk prices and margins over feed cost.
I've always argued that you can't lose money locking in a profit. Yet most dairy producers hate to leave money on the table. The run-up in futures in late 2007 and in 2008 soured many producers on forward pricing.
The bigger problem is that it's not always possible to lock in a margin above feed costs. The hardest thing to do is execute a trade that simply minimizes losses.
This year is prima facie evidence that a lot of producers couldn't find a net margin last year. Last summer, Class III futures moved up from $17 to $18 and higher. However, corn futures were also rolling up from $5/bu. to $6/bu. and even $7/bu. Soybean and soybean meal prices were as bad, and that didn't leave much margin over feed cost.
Steve Bodart, a dairy industry specialist with Lookout Ridge Consulting, says about three-quarters of his large-herd clients normally have 50% of their milk forward priced. This year, the number is 60% with just 30% coverage.
Too many producers
felt they got burned in the price run-ups of 2007 and 2008. Then, with the lousy margins over feed costs last year, many opted not to book. Ouch.
The lesson here is that the market doesn't always offer a net margin. Sometimes you have to lock in contracts simply to minimize the red ink, says Matt Mattke, a Market360 adviser for Stewart-Peterson.
The key, he says, is to take those hits in small increments, booking 10% or 20% at a time. That way, if the market should happen to move in your favor, you can book additional protection.
Anyway you cut it, 2009 is going to be a nasty year. But producers who were able to lock in even $13 or $14 Class III contracts will be $2 or $3 ahead of those who didn't.
Add in some hefty Milk Income Loss Contract payments in March, April and May, and pretty soon they're close to break-even—at least for months in which they're eligible for MILC payments.
In this bleak year, that might be as good as it gets.
Understanding Dairy Markets
USDA''s MILC site