One of the most difficult decisions dairy producers face is whether or not current milk futures prices are “good” prices. The first problem is: What is a definition of “good.” Frankly, producers look at a “good” price as one that is “high.” So that naturally brings on another question: What is a “high” milk price? That usually brings on another question: Is the price “high” enough to be profitable? This is starting to get us closer to the essence of the question, but determining a price at which to forward price milk is obviously a dizzying process! However, by following a few simple principles I think it is relatively easy to determine if a future milk price is a “good” milk price. The dairy producer should take six items into consideration:
1) What is my cost of production? A dairy producer trying to price milk without knowing his/her cost of production is like a cross country traveler attempting their long trip blindfolded and without a map. Such a traveler would only successfully reach his destination by blind luck. The same is true for the dairy producer who does not know their cost of production. Every dairy producer should calculate their cost of producing milk at least quarterly. You cannot properly judge a future milk price until you know whether or not it is profitable. Many good tools are available for this purpose. I have a simple Microsoft Excel® cost of production spreadsheet that uses income tax Schedule F information. To obtain a copy, just contact me (email@example.com). By calculating your cost of production you will know your breakeven milk price which is always your starting point when making milk marketing decisions.
2) What are my marketing goals? Many dairy producers expect to hit a home run every time they forward price milk. That is not the goal of marketing! Is it possible to hit a home run once in a while? Yes! But, unfortunately, most home run hitters also strike out a lot. Remember, the goal of milk marketing is to control milk price risk. A good marketer may end up with the same average milk price as the producer who does not forward price milk. But, the good marketer will take some variation out of milk prices. For example, let’s say the average mailbox price for the year was $18/cwt. How would you prefer to receive that price? Look at the table below. Which would you rather receive: Scenario A or Scenario B? Both give you an average annual milk price of $18/cwt, but scenario B will result in some very tight cash flows in at least three months. Never forget that milk marketing’s primary goal is to reduce milk price risk and “smooth out” the milk price. Profit enhancement is, at best, a secondary goal. Practice moderation in your milk marketing by not trying to hit a home run each time you forward price milk. There are a precious few times when the market will offer an opportunity to hit a home run, but those times are the exception rather than the rule.