With the volatility in milk and feed prices we have experienced over the last several years, I have yet to find a viable way to manage price risk.
It seems the more I study this topic, the more confused I get. I have attempted over the last several years to develop some strategy on my own using the futures market and other risk management tools available. Thankfully, I never actually executed a plan with real dollars, as I would have lost more than I made in just riding the market.
In our fluid market, processors rarely want to forward price milk unless there is somewhat of a bull market, and they want to lock in lower prices. I have done better letting the market dictate my price than using forward pricing. In my opinion, there seems to be an inherent bearishness in future milk prices, so over time, the market out performs forward pricing.
On the expense side, we do forward price most of our feeds when prices are low as they are now. We have booked half of our corn needs for the next year and are exploring booking even further out. At these levels and even with the large crop, there is a lot more upside potential than further downside.
Several years ago, with the market distorting ethanol mandate driving prices too high, we bought feeds only as needed. We hope to soon have our cottonseed, citrus pulp and protein source bought for the next year.
Last year, we bought into the Dairy Margin Protection program at a $6 level. Now with a year’s experience, I will do no more than the minimum and will consider even that a waste of money. The formulas used in deriving the margins have little correlation to what our milk and feed prices are here in Florida.
If we were to experience this catastrophic $4 margin in the future, we will exit the industry before burning equity as we did in 2009. I would favor a supply management program if it could raise prices in a bear market, but believe that is impossible to do in the world market we must now deal with.
Source – Dairy Today