The CME Class III milk futures market offers some tremendous opportunities to lock in a good price for milk, says Scott Werlein, commodity broker with First Capitol Ag in Platteville, Wis.
At the close of the market February 9, all of the contract months from February through November were trading at or above the top one-third of the historical BFP/Class III price — and many were above the top one-fifth of historical prices. Anytime prices hit the top-one third of the historical price range for a given contract month, producers should lock in a price for at least a portion of the milk they produce. Use this chart of historical milk prices for comparison with the Class III milk futures contract prices offered today. Click here to view the chart.
Remember, risk management is not about getting the highest price; it’s about locking out the lows and locking in a profit, says Werlein. But locking in a price floor doesn’t mean that you have to lose all of the upside potential.
For example, on February 9, you could have sold a July Class III futures contract for $13.69 to set your price floor. And, you could have bought a $14.50 call option for 30 cents per hundredweight to capture the upside potential. Then, if the Class III price for July is announced at $16 per hundredweight, you receive an extra $1.20 per hundredweight from the $14.50 call option ($1.50 difference in price - 30 cents = $1.20).