In November, milk production moved above year-earlier levels for the first time during 2001. The USDA’s November “Milk Production” report showed milk production climbed 0.4 percent compared to year-ago levels. Does this reversal in milk output signal the beginning of a new trend in 2002 — growth in milk production?
A recent USDA report seems to think so. According to the USDA’s December Agricultural Outlook report, the milk supply is forecast to increase almost 3 percent in 2002.
Although slightly less optimistic than the USDA, Ken Bailey, agricultural economist at Penn State University, also predicts next year’s milk supply will be up — about 2.2 percent.
Both of these predictions, however, point to the possibility of increased milk production next year. And if that happens, particularly at a rate greater than 2 percent, it could dampen milk prices — especially if consumer demand falls short of current expectations.
Rather than take a “wait-and-see” approach, now is a good time to examine the opportunities that exist to lock in a price for your milk. The futures market offers one such opportunity.
Take a look at futures activity at the Chicago Mercantile Exchange. On Dec. 18, all of the Class III milk futures contracts for the first six months of the year — except January — exceeded the historical average (calculated from 1988 through 2001) for each of these months. For example, the settlement price for the February contract was $11.79 at the Chicago Mercantile Exchange, up 29 cents from the previous trading day and 46 cents above the historical average of $11.33.
Whenever current futures prices match or exceed the historical average, it offers a chance for you to lock in a portion of your milk at favorable levels.
In addition to comparing daily settlement prices to the historical average, you also can compare the daily settlement price to the historical top third and bottom third of Class III and Class IV prices. To do so, visit: www.dairyherd.com/markets/dairyprices.ihtml
Once there, click on “Graphical analysis of Class III settlement prices,” and “Graphical analysis of Class IV settlement price.”
These graphs compare daily settlement prices for Class III and Class IV milk futures contracts to the historical average, bottom-third and top-third of historical prices. This is a great tool to use to help make hedging decisions.
In addition, Bailey suggests the following strategies to help you determine when and how much of your milk supply to hedge:
1. Never hedge a year’s worth of milk production at one time.
2. Establish a maximum amount of your milk production to hedge at one time.
- Beginners: Hedge no more than 30 percent to 50 percent.
- Experienced producers: Hedge no more than 50 percent to 75 percent.
3. Hedge the rest of your milk supply as opportunities arise during the year.
4. Avoid hedging next month’s milk production.
5. Avoid hedging anything beyond nine months.
Keep these points in mind as you explore hedging opportunities in 2002.