Something Needs to be Done, or Does It?
Nov 09, 2009
By Robin Schmahl
Dairy product prices have been exhibiting some real strength over the past few weeks. Cheese prices increased from aggressive buying as demand for fresh cheese picked up and orders needed to be filled. We know there is plenty of cheese in storage that is available to the market. However, daily cheese price on the CME spot market is a component of the milk price. Cheese traded on the spot market cannot be over 30 days old. If demand for fresh cheese increases and the availability is tight, the price will increase regardless of the amount of cheese in cold storage. If the amount of cheese in storage is low, but there is reduced demand for fresh cheese, price will decrease.
There has been much discussion over the years of the viability of pricing the nation’s milk based on trading at the spot market. For years, cheese and butter traded only once per week, and eventually moved to daily trading. More discussion surfaces when milk prices decline, especially when little trading has taken place. When prices increase, farmers are happy and have no problem with cash prices increasing on little or no trading. They know they will be receiving a better milk check.
The implementation of a supply management system to keep prices higher has been discussed. Some of this discussion has recently fallen to the back burner due to the increasing prices. This seems to be a pattern. There is no easy solution to keeping supplies available, prices high at the farm level, and affordable prices to the consumer. So something needs to be done in one form or another to minimize the boom or bust cycle that the dairy industry has moved into. Just simply killing cows is not the answer as higher milk prices will result in increased cow numbers.
Irregardless of whether something will eventually be implemented, all producers and manufacturers have the futures and options market available to protect prices and profitability. Marketing your milk is not easy and no one wants to give up any price potential. So, many get involved in using futures and options in order to outguess the market. They intend to make money in their account as well as receive a higher milk price. Trying this speculative approach many times results in frustration and money lost. Instead, the futures and options market needs to be used as a tool to hedge a profitable price when feasible. You need to look at the long-term. Being able to increase equity in your operation and cash flow consistently is much the same as having a supply management program in place. Only this allows you to produce as much milk as you wish as well as expand the operation to bring in other family members.
Those who have viewed marketing as price protection have been better off this year. They hedged good prices for the year back in 2009 and have not felt the strain quite as much as those who decide to take the highs with the lows.
I am becoming concerned that a similar situation is developing now as it was during the first half of 2008. Milk prices are at a significantly different level, but the same idea seems prevalent. Many are anticipating that milk prices will improve dramatically now that milk production is slowing and cows are being killed. Futures prices have moved above the cost of production in many cases, but the recent idea is that milk prices will move as much as $4.00 higher sometime in the first half of the year. This is again causing farmers to be willing to fill barns with cows or expand to make up for lost income. So, instead of implementing a strategy to allow for higher milk prices as well as establish a floor to protect price, most will opt to do nothing.
This year will be a critical year for many in the industry. Utilize what is available to lessen your chance of becoming a casualty.
Upcoming reports to watch for are the World Supply and Demand report on November 10, the fluid milk sales report on November 13, the Monthly Livestock, Dairy, and Poultry report on November 17, the October Monthly Milk Production report on November 18, and the October Monthly Cold Storage report on November 20.
--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.
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