You’re about to go through an exercise to help you tackle frustrations you may be experiencing right now with milk prices. With prices low and futures contracts bearish, now is the perfect time for this. Prices are going to change. Until then, and when they do, why not invest a few minutes to improve your mindset and, possibly, your bottom line?
The ideas I’m about to share are based on a No. 1 best-selling book, The Present, which examines simple, profound truths related to how people tend to think about the past, present and future.
I’m merely applying those truths to price risk management. These truths not only can help reduce stress and lead to more success in your dairy business; they can, the author believes, also help in life.
Let’s start with the present
Imagine a moment when you were fully engaged in what you were doing. Total engagement might be a daily occurrence for you. All that matters is: You were so engaged in that present moment, your mind wasn’t disturbed by other thoughts.
With the idea of total engagement in mind, let’s focus on the present market for milk and feed.
Milk and feed prices have flat-lined (Figure 1). Bearishness is reflected in Class III futures contracts through 2017, with those contracts having recently declined $0.50 to $0.90.
Class III milk reached these low levels because of higher global supplies, primarily due to stronger growth in the U.S. and Europe. The higher dollar also cut into global demand for U.S. dairy products. On top of that, China cut back on its demand for global dairy products.
In times like these, do you stress over the outlook for milk prices or think about missed price opportunities from the past? This is only going to increase anxiety. Author Spencer Johnson, M.D., asserts that when times are tough, you should look for the good around you.
Focusing on what’s good improves your mood and provides energy to tackle whatever challenges with which you might be dealing.
Case in point: Consider the low price of feed. Three record or near-record years of corn and soybean yields have contributed to the current high value in feed costs. Will that value remain high? Don’t even consider the future right now. For this exercise, stay in the present moment.
Before we go on, in order to make this exercise work, we’re going to assume you have practiced staying in the present to the point where you can honestly stay focused on what is good right now. Only then can you truly tackle the second part of this exercise – the past.
Think about the past
Your past is fertile learning ground. It’s a place where you have achieved success and endured failure. When something isn’t going well for you in the present moment, turn to your past.
Let’s go back about 10 years. If you’ve been dairying for at least that long, you’ve seen today’s market before (Figure 2). In 2006, corn, soybean and milk prices were low.
Then, during the course of the year, all three began to trend higher. In 2007 and 2008, milk and feed prices exploded to record highs.
A similar pattern occurred in 2002 and into the first half of 2003. Then, in middle to late 2003, prices for milk and feed started to rip higher, and by 2004 milk hit $20 for the first time.
Unfortunately, many producers in today’s market will repeat a common mistake and get caught up in a trend, thinking it won’t end anytime soon, and not take action that prepares them for change.
We don’t know what 2016 has in store for milk prices. We do know that the market follows a typical cycle of overproduction followed by significant underproduction. There’s really no middle ground where production is in balance with demand.
Change is inevitable. With that in mind, now is a good time to implement strategies that leave open the opportunity to capture higher milk prices, should we see them, while protecting you should the price fall from here.
Why protect feed now?
The May 2016 corn price as of this writing is trading around $3.70. Since 2007, it has traded from slightly below $3 to as high as about $8.50. With the price now in the middle to low end of its range over the past nine years, feed is a value.
Several factors provide reason to believe we will see grain prices rally in 2016. Consider those three consecutive record or near-record yields I mentioned earlier. The odds of corn seeing four consecutive years like that stand at only 2 percent.
As always, keep an eye on weather. Watch the U.S. Dollar Index too. Several factors have contributed to the dollar’s overall decline, including Federal Reserve Bank policy, the current U.S. account deficit and our volatile stock market.
A lower dollar would likely result in increased demand for U.S. grain, a decrease in U.S. stocks-to-usage ratios and, ultimately, a gain in feed prices.
Feed is the present silver lining. Now is the time to implement strategies that protect what is good.
Prepare for the future
Let’s again assume you are able to focus on what’s going well in the present and that you have learned from the past. You’re now ready for the third and final part of this exercise – the future.
At the moment, the future for milk prices isn’t rosy. Dwelling on a negative outlook, however, is a sure ticket to anxiety. Anxiety creates stress and saps energy. Don’t allow yourself to live in the future; do take steps to prepare for it.
How? Take what you learned from the past and apply it to the future. If you knew in 2002 and 2006 what you know today, wouldn’t you have secured feed costs and been patient on milk? With today’s market looking a lot like it did back then, I encourage you to prepare for what could be a repeat.
Ultimately, for you to reap benefits from this way of thinking – prepare for the future by learning from the past in order to be better off in the present – you have to work and live with purpose. On that point, a dairy farmer is already a step ahead of most people. PD
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
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Patrick Patton
- Chief Operating Officer
- Stewart-Peterson Inc.
- Email Patrick Patton
