Take the Opportunity to Hedge Feed Prices

Published on: 11:22AM Oct 17, 2011

Milk prices have been good. But think of the volatility we could experience, especially as next year rolls around and production becomes more critical to ensure we do not run out of corn.


September was a brutal month as far as Class III futures prices are concerned. Contracts fell almost on a daily basis with only a few brief rallies, know as a "dead cat bounce," taking place.

Traders became bearish as their perceptions of price potential dimmed. The October contract fell $1.18, November declined $1.97 and December declined $1.66 for the month. Contracts for the first half of 2012 declined as well, but not to the extent these three contracts did. Second-half contracts for next year remained fairly stable.

This bearishness in milk was not completely the result of a significant decline in cheese prices. For the month of September, blocks fell 7 cents while barrels lost 9 cents. Another factor involved in futures prices falling was the elimination of some of the price premium that had been kept in the market. Seasonally, September or October is our highest price and/or demand month. High feed prices were expected to tighten milk supply as higher culling and/or lower-cost rations were expected to impact milk output.
Milk prices have been good overall this year with Class III prices for the first nine months averaging $18.28. However, high feed prices have impacted income over feed costs, leaving us not much better than a year earlier. One thing we can be thankful for is that milk prices and feed prices have kept pace with each other to some extent. Some areas of the country experienced very high corn prices as supply became tight and corn had to be shipped in from a great distance. As harvest is progressing, this should be alleviated somewhat.
Grain prices have declined significantly over the month of September and are allowing producers to hedge feed prices for the upcoming year. I mentioned in my previous article that grain prices needed to be watched closely. It appears the markets have bottomed since the beginning of the month and have been sideways to higher. If you need to hedge feed prices, now is the time to get it done.
USDA recently released its price and ending stocks projections for 2012 on the World Agricultural Supply and Demand Estimates report. Corn ending stocks were raised from 672 million bushels to 866 million bushels and above the trade estimates. The initial reaction was bearish because stocks were projected to be above expectations.
But, let’s face it, ending stocks of 866 million bushels is tight. Ending stocks last year totaled 1.128 billion bushels. There was much volatility over the past year. Think of the volatility we could experience this year, especially as next year rolls around and production becomes more critical to ensure we do not run out of corn. Protecting feed price will eliminate that stress in your life for the upcoming year. Purchase some call options or call option spreads to protect against rising prices. Forward contracting should also be considered if basis is not too wide. This is an opportunity that you do not want to miss.
Also on the report, USDA released estimates for milk production and dairy prices for 2012. Milk production is estimated to increase 2.5 billion pounds, totaling 198.4 billion pounds. Taking into consideration potential production and demand, USDA reduced its 2012 estimate for the All-Milk price by another 10 cents to a range of $17.75-$18.65, a decrease of about $2.25 per cwt. from next year.
Upcoming reports:
-          Fonterra auction on Oct. 18
-          September Milk Production on Oct. 19
-          November Class I price on Oct. 21
-          September Livestock Slaughter on Oct. 21
-          September Cold Storage on Oct. 21
-          Commercial Disappearance on Oct. 25
-          Agricultural Prices on Oct. 31
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He can be reached at 877-256-3253 or through his website at www.agdairy.com.
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and it may not be suitable for everyone. Those acting on this information are responsible for their own actions.