Pricing milk in 2019: How Are You Doing So Far?

Lee Gross, FYP Consulting

Lee Gross, FYP Consulting

What’s your plan for pricing milk for the New YearD?  Will you use the new Dairy-RP program?  Do some hedging?  Forward price with your processor?  Or stay on the sidelines and take what’s offered?  These are some of the questions we poised for readers this past January.  I followed up with Robin Schmahl ([email protected]), our marketing coach at FYP Consulting, to see how his customer’s plans have fared.  Spoiler:  It’s not too late to take action and secure some higher milk prices.

A lightly edited transcript of our conversation follows.

Lee Gross

In January, your advice to dairy producers for 2019 was to “Be a price maker – not taker, and stay in business”.  How are the producers faring that took your advice?

Robin Schmahl

They are faring well. Strategies were implemented to establish floor prices when milk futures with added basis reached above cost of production. This was a measure of protection in the event prices moved back down. This did not take place and higher prices have allowed for producers to take those higher prices over the last few months.

Gross

What strategies have worked best?

 

 

Schmahl

Some who did Dairy Revenue Protection insurance in October or early November last year after it was released received an indemnity. Those who did it later in November and December did not. However, this insurance did what it was supposed to do and that was to protect against declining milk prices and that is what it did. Options accomplished the same purpose by protecting a floor while leaving the upside open to take advantage of higher prices.

Gross

And how have things gone for those producers that shipped milk without using marketing tools?

Schmahl

It has been one of those years that those who have not used any marketing tools have been able to do well after the lows were established in January and February. Price protection did not need to be established. The outlook for milk prices looks good according to milk futures prices. However, it is recommended to use Dairy Revenue Protection insurance or put option strategies to protect these higher prices. It is critical to guard against unexpected price declines.

Gross

Without trying to predict milk prices for the rest of the year, what can producers do now to secure better milk prices?

Schmahl

It has been three years since we have seen the second half of the year showing $17.00 or higher. Steps should be taken to protect these prices while leaving the upside open. Again, put options and Dairy Revenue Protection are the strategies to use. I do not recommend forward contracts or futures unless those prices are acceptable prices and the dairy farmer will not worry about giving up upside potential if it develops.

Gross

We talked back in January about the advantages of knowing costs of production.  What about feed prices?  Have your customers been able to capture some lower priced feed?

Schmahl

Protecting feed prices is just as important as protecting milk prices. There are generally two opportunities during the course of a year to hedge feed prices. These opportunities vary depending on fundamentals. One must be prepared to hedge when prices decline. Most customers were hedging feed prices during the first quarter of this year. It generally makes sense to hedge feed prices early in the year before planting begins.

Gross

How about other inputs like gasoline or LP gas?  Are there opportunities in those inputs?

Schmahl

Yes, gasoline and diesel fuel should be monitored and forward contracted when prices decline. It is a large expense on most farms and many times one that is overlooked for hedging opportunities.

Gross

To wrap up, what can producers be thinking about and doing as we look at the second half of the year?

Schmahl

Producers need to be focused on protecting their cost of production. Some farms may not have had to exit the dairy business over the past few years had they been actively taking the steps to develop a marketing plan with a marketing specialist. It is important to work with someone who will focus on marketing while you are busy running the dairy operation. Most work with a nutritionist, crop consultant, veterinarian, lender, financial consultant, etc., but fail to partner with a marketing consultant. A producer can have all aspects of the dairy running proficiently yet still lose money because milk prices decline or feed prices increase.

Gross

Anything else you want to add Robin?

Schmahl

It is always easier to hedge milk prices as the market increases, especially when utilizing options and option strategies. Established floor prices with options can be rolled up to higher floor prices if milk prices continue to increase. The goal is to have the confidence costs are covered, along with the ability to capture higher prices for milk and protect against higher prices for feed.

You can contact Lee Gross directly at  [email protected] or  www.fypconsulting.com.

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