Producers’ concerns for the future are often eased by examining and hedging the margin between the milk price and feed prices rather than just one side of the equation.
By Katie Krupa, Rice Dairy
I started this discussion earlier month by introducing the importance of hedging the milk-feed margin.
In this column, I’ll provide some more details to give you a better idea of the current price situation. To review, it is important to hedge both the milk price and feed price to limit your risk exposure to price volatility on both inputs and milk sales. If you hedge only your inputs or only your milk price, you are exposing yourself to price volatility, and therefore not implementing a complete risk management strategy.
In recent days I have received many phone calls from producers who are panicking about higher feed prices. If you are one of those producers, let’s review the current milk-feed margin. The higher feed prices, while scary to see, are less alarming when you look at the relationship between milk and feed.
Below are four graphs, each showing trading prices on the Chicago Mercantile Exchange (CME) since May 1, 2012.
The first graph shows the December 2012 Class III futures contract, which has increased roughly $3.00 per cwt. since May 1. The second, December 2012 corn futures, shows an increase of roughly $2.50 per bu. since May 1. The third, December 2012 soybean meal futures, indicates an increase of roughly $100 per ton since May 1.
The first three graphs have an upward trend that is easy to see. But the last graph, December 2012 milk-feed margin, doesn’t seem to show much of an upward or downward trend since May 1.
The milk-feed margin graph plots the milk minus feed price (the formula is roughly 1 cwt. of milk, minus 45 lb. of corn, minus 17 lb. of soybean meal). This is simply a default model I use to get a better understanding of the milk price relative to the feed costs. It is not a perfect fit for any specific dairy. The milk-feed margin graph shows a variation in price since May 1 but not a clear trend. The price has mostly fluctuated between the $8.00 and $9.00 range, with it recently trading around $8.50.
Many producers call and say, “I guess I should have contracted a couple months ago.” If we compare the milk-feed margin on May 1 to July 26, the margin has actually increased about 40 cents. So, although the feed prices have increased considerably, the increase in the milk price has been strong enough to actually outpace the feed price increase.
Unfortunately, I do not know if the milk-feed margin will continue to increase or will change direction and decline over the next couple of months. Therefore, I recommend that producers take a look at the margin, and see how it compares to their unique farm financials.
For example, the current milk-feed margin for December 2012 is trading around $8.50. That may return a $1.00 per cwt. profit for one farm, while it may be a loss for another farm. If that $8.50 is a profit for your farm, you have some opportunities to either lock in or protect that margin, and effectively protect your profits. This type of hedging is new for most producers across the country, so don’t feel overwhelmed if you are not hedging both your feed prices and milk price.
But I would recommend taking some time to talk with a professional and gain some more knowledge on what your risks and opportunities are relative to milk and feed price hedging.
While it is easy to look back at the past, looking ahead to the future is uncertain and scary. My advice is to take some time to review the milk-feed margin and see what hedge strategies are currently available. I find that producers’ concerns for the future are frequently eased by examining and hedging the margin between the milk price and the feed prices rather than just one side of the equation.
| Graph 1 shows the December 2012 Class III futures contract, which has increased roughly $3.00 per cwt. since May 1. |
| Graph 2, December 2012 corn futures, shows an increase of roughly $2.50 per bu. since May 1. |
| Graph 3, December 2012 soybean meal futures, indicates an increase of roughly $100 per ton since May 1. |
| Graph 4. |
Katie Krupa is the Director of Producer Services with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. You can reach Katie at klk@ricedairy.com.Visit www.ricedairy.com. There is risk of loss trading commodity futures and options. Past results are not indicative of future results.
