Combatting Low Milk Prices – Ag Matters

With little bright news on the horizon regarding milk prices, how do you stay afloat as the profit margins shrink?  Is Price Protection or the futures market the answer?  Cornell Cooperative Extension offers some options as well as forecasts for the future.

A couple of recent news reports didn't offer much hope concerning milk prices.  A report from Tom Bailey, a New York-based analyst at Rabobank International shed some light on just how bad prices are:

Global dairy prices have dropped 39 percent from an all-time high in February 2014 and are the lowest in five years, United Nations data show. In Chicago, benchmark Class III milk futures, used in cheese making, are down 36 percent to $16.23 per 100 pounds from a record $25.30 in September. Prices may fall to $14.41 by the end of the year before recovering in 2016.

Bill Brooks with FC Stone’s Financial Service Company, didn't offer any bright spots when it came to profit margins:

 “Dairy profits may not last much longer. Income over feed costs will fall 38 percent to average $8.90 per 100 pounds of milk in 2015, from a record last year.

CCE says there are ways to combat the depressing news, suggesting "producers should look beyond the Margin Protection Program (MPP) for risk protection, and consider the futures market in milk prices."

Futures market is accomplished by buying or selling of futures contract to offset the price changes in the cash market. A futures contract involves a commitment to either accept or make delivery of a specified quantity and quality of a commodity at a specified time. However, dairy futures contracts are cash-settled rather than settled through delivery of the commodity. Rather, the commitment is to make up any difference between the price at the time of sale or purchase of the contract and the price at the time the contract expires. “For example, if a November Class III milk contract was sold at $15.00 per hundredweight and the announced Class III price for November turned out to be $16.00, the seller would cash settle by paying $1.00 per hundredweight to the buyer of the contract.”

Get more details on how futures and options trading for the milk and dairy industries work at the University of Wisconsin Dairy Marketing and Risk Management Program.

SOURCE: Cornell Cooperative Extension - Bonnie Collins