Ready to Contract Milk

November 17, 2010 09:48 AM

ZachMyers 125x125

Zach Myers 

Jonesville, N.C.

Myers Dairy, in the Appalachian foothills, is home to 830 Holsteins and 700 replacements.



October prices


(3.6% bf, 3.0% prt) $18.61/cwt.

Cull cows

Springing heifers $1,500/head

Ground corn $225/ton

Soybean meal $395/ton

Alfalfa hay
Don’t use

Don’t use

*Extended comments are highlighted in blue.

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 gave us more pricing 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 choose to purchase a minimum Class III price.

3. I can choose to 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 a 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 minimum/maximum, you save money but you possibly give up an opportunity if the Class III price moves higher than the max.

I plan on contracting more of my dairy’s milk production 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 Orders 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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