We have now turned to page to a new year and with it will be challenges that need to be faced. The next few weeks will be a time of trying to remember to put 2016 on any checks we write or any other correspondence on which we need to affix a date. These are the least of the challenges that are ahead of us. We can look back at 2015 and see what we could have; should have; or would have done, but that may make some of us depressed. Hind sight is always 20/20. Our main focus needs to be how we can do better in 2016. Is there anything that was learned in 2015 that can help us and our operations going forward? Are there any new ideas that we need to embrace to increase the efficiency or profitability of our businesses? Yes, dairy farming is a business and needs to be treated as such. It is a business that supplies quality dairy products to consumers and is subject to the rise and fall of demand – not only domestically, but world wide. As such, it is subject to substantial price volatility unheard of 20 years ago. Even with an increase in price volatility, milk production continues to establish new records with milk production for 2016 currently estimated to exceed last year by 4.0 billion pounds and a new record of 212.4 billion pounds.
The average Class III milk price for 2015 was $15.80 and pales in comparison to the average milk price of $22.34 in 2014. This was a decline of $6.54 per cwt. Class IV was not quite as bad, but still not very good. The average of 2014 was $20.08 with an average for 2015 of $14.36, a decline of $5.73 per cwt. Yet with this difference of milk prices, it has so far had little impact on milk production or cow numbers. What can we expect this year? I certainly do not believe milk price will again fall with the magnitude of what they had this past year, but there certainly is indication that lower prices may yet unfold. It will be contingent on supply and demand. At present, the U.S. is having difficulty competing in the world market due to currency exchange rates and the difference of U.S. dairy product prices to world prices. The only category that is competitive and moving well is nonfat dry milk/skim milk powder as price is competitive and demand has been good.
Individual dairy operations do not have influence over world prices and competitiveness, but each dairy operation has the opportunity to manage price risk. I know this may be easier said than done, but it is a necessity along with cow comfort, nutrition, breeding, feed efficiency and production, udder health, etc. It is something not to just dabble in, but to employ. I have had discussions with dairy producers over initiating strategies to protect some of the downside price risk while leaving the upside completely open to take advantage of a higher price. The strategies I am referring to is the simple purchase of put options in closer months and the implementation of put spreads for later months. These strategies required only option premium to be deposited with no further margin money to be paid. Some embraced the idea while others indicated they did not want to tie up any money and decided to let their businesses open to whatever the market will give. This thought process and the short-term look at immediate finances has had a devastating impact on many farm incomes over the past year as well as what had transpired in 2016 futures contracts over the past few months. These strategies are insurance policies. Not employing risk management leaves farm profitability and the business open to hope and hope does not pay the bills and leaves one in a state of anxiety. Price risk management is a necessary and important part of the business plan for the farm.
-California December Class 4a & 4b prices
-Global Dairy Trade auction on January 5
-November Dairy Products report on January 6
-World Agricultural Supply and Demand report on January 12
-Quarterly Grain Stocks report on January 12
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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