Despite my intentions to keep milk prices out of my conversation, I find this to be a good time to bring them up anyway as we are back in the realm of historically high futures prices and it's a lot more fun to talk about $20 milk than $12.
I realized shortly into my venture into risk management that good or bad, I was going to be stressed about milk prices despite the fact I don't milk cows for a living. Being as I started in 2009 and cut my teeth through months of the most devistating price cycle in history, I have spent considerable time trying to help dairy farmers manage through nasty prices, and stressing (to a lesser degree of course) right along with them. I grew up working on a dairy, sharing in the joys and challenges of that lifestyle; I have spent years in school studying the industry, building relationships with people devoted to dairy and making delicious, nutritious dairy products, and I while I may not technically milk cows, I'm still completely intertwined with milk markets. As a result of my ties to dairy and job working with forward contracting milk prices, I have spent considerable time watching the futures market and while I'm no expert, I have noticed a couple things.
First, futures markets are not to be confused for future price indicators. Make no mistake, futures are a way for people to make money and they spend a lot more time studying trends and fundamentals than your or me. As such, if there is a big secret to making money on milk futures, they would know it first.
Second, there is no big secret to making money on milk futures. I say this because I believe the markets work to tell you, based on things known and unknown at that time, expected future supply and demand relationships (prices). When the price is "good" to you, take advantage of the futures price. If you do this consistently, you will thoretically have a price that works for your business consistently. And like the saying goes, no one ever went broke making money. It's not about always beating the market, its about always having a price that keeps you in business.
Third, decide if you are speculating or striving for risk management. If you take a futures position (lock in a milk futures price) because you are convinced the market will go up or feel strongly it will go down, you are speculating. That's fine, just realize this is not the same as consistently protecting a price that works for your farm business.
Fourth, the milk price is affected by numerous factors domestically and internationally, and these will continue to drive the market crazy. It will create opportunities, such as $20 class III milk, which translates to $22-$25 to most of our Northeast farms- which we are currently enjoying- and it will create challenges, such as significant and unpredictable volatility.
I am thrilled to see prices so high because I know full well how badly farms need this price recovery. I do hope however, that farms will realize that markets will keep moving, and they have tools available to help them manage prices and the crazy ups and downs. We are not in traditional markets anymore, and risk management is a valid option for farms looking to add predictability to their milk check!
That's all from that particular soap box.
Til next time,
