Milk Prices: Respect the Upside Risk As Much As the Downside

“Be quick to protect survivable prices with products like the Dairy Revenue Protection program, but slow to use tools like forward contracting,” he advises.  ( Canva )

I sat down to write this column on July 1. When I think back over the past six months, I can relate to one of those memes floating around social media that says, “Go home 2020, you’re drunk.” 

What a whirlwind! When we rang in the New Year, I wrote a column inspiring you to make the most of the New Year. I wrote, “The challenges of 2019 are behind us, and I’m declaring 2020 will be our year.” Oops. 

I mean I wasn’t entirely wrong. Class III milk prices are currently at levels we’ve not seen in years. However, I wish it hadn’t taken a global pandemic, implementation of base and excess programs and the most significant government intervention we’ve seen in decades to get us here. Let me be clear, the spring was brutal. Staring down the barrel of $12 milk in April, nobody thought we’d see anything above $18 this year, let alone $22 milk. Still, we’re not out of the woods yet. 

The combination of COVID-19, the presidential election and a historic level of government intervention adds a level of unpredictability to the markets that’s hard to measure let alone control. Ryan Yonkman of Rice Dairy shares some strategies to help you weather this storm. 

“Be quick to protect survivable prices with products like the Dairy Revenue Protection program, but slow to use tools like forward contracting,” he advises. 

In the current market environment, we have to respect the upside risk as much as we do the downside risk. 

When you read this, there’s a good chance you’ve already received your June milk check. My guess is you were taken aback by how much the negative Producer Price Differential (PPD) was on that check. Extreme market volatility and the new Class I milk pricing formula implemented last year means significantly negative PPDs are here to stay for the next month or two at a minimum. 

PPDs, which are calculated as your blend price minus the Class III price, are the most extreme when there’s significant volatility and the spread between Class III and Class IV widens. 

“We’ve just experienced both of those,” Yonkman says. “Right now, you’ve got a historic III/IV spread in June and July. Class III is trading $6 to $8 higher than Class IV.”

We know for the next two months, PPDs will be terrible, he adds. The PPD is something that is 100% out of a producer’s control, but you can plan for it to avoid a cash crunch. 

Don’t overestimate your milk check. 

 
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