Are Milk, Feed Prices for Real?
Feb 28, 2011
There’s reason to be bullish. Yet, while the current rally may stick around for a while, do what you must to prepare for its departure.
By Steven Schalla, Stewart-Peterson
It’s amazing how a simple question can have a not-so-simple answer. In less than two months, milk futures have experienced one of the most dramatic rallies since the futures market opened in 1996. March milk began 2011 at a mere $14.06. By Feb. 16, it was at $18.98. Despite fundamental changes that the market has started taking into account, this change of nearly $5/cwt. has a lot of people scratching their heads and asking a lot of good questions.
Let’s start with what everyone wants to know: Are these prices for real? More to point, are we actually going to see these high prices when these future months expire? While no one knows for certain, our analysis shows there is a strong possibility for current prices, or higher prices, to be had this spring and summer.
Prices like these don’t come around very often. Over the past 11 years, only 14 months have shown us a base Class III price over $18.00/cwt. It definitely takes the right mix of conditions to see the highest end of milk prices. I personally feel, with the fundamentals at hand, now is as good a shot as you’re going to get.
That said, keep emotions in check. It would be foolish to blindly assume that $20 milk is coming and you therefore don’t need to be engaged in marketing. On the other hand, knee-jerk selling at the first sign of weakness may also get you in a pinch. Now more than ever, it is critical to have your action points laid out ahead of time so that in the heat of the moment, decisions are made with a steady hand and without emotion.
Similar to 2008, the challenge may be in feed costs erasing much of the profitability that high milk prices would otherwise bring. I will acknowledge that some operations are more exposed to this situation than others, but, everyone will feel the effects, directly or indirectly, if grain prices rocket higher this spring or summer.
While USDA released projections last week of 92 million corn acres and 78 million bean acres for the coming spring, cotton has become the wild-card crop after its historic run-up in prices. If there is a shift in acreage this spring with more land going to cotton, you will see that much more pressure on a perfect growing season for corn and beans.
If that perfect growing season materializes, expect grain prices to be at significantly lower levels by harvest. With prices already near historic highs, protecting feed purchases with a put option position is a great strategy to learn and entertain.
Looking ahead, it certainly appears the price rollercoaster will continue for both milk and grains into spring. With some planning now, and with the right strategies, it is very possible to navigate the loops and twists that lie ahead, and arrive at a better financial position when the ride is finally over.
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