Dairy farms come in all shapes and sizes. Each one is unique and each dairy producer has his or her own management style based on personal strengths and preferences. They have different habits or routines that characterize the farm.
Most of these habits involve working with the cows, managing people and handling tasks that require physical engagement. However, other aspects of farming involve sitting down and looking at a screen.
That screen can connect you to the rest of the agriculture industry. The financial version of that is the markets. The large amount of people represented in these markets, whether it be fellow farmers, commercial entities or professional traders, combine to produce crucial information to those who run agricultural businesses.
In the case of the dairy farmer, milk prices will tell you your projected revenue for that tasty product produced by your cows. Feed prices tell you about how much of that revenue you have to pay to keep those cows fed and happy. These prices are changing constantly throughout the day – sometimes by quite a bit.
Considering this, it behooves the farmer to know this information. Just how much of this do they need to know? How often should they check prices? I’ll describe the profile of three categories of dairymen based on how often they check the markets.
Daily
In talking with a handful of dairies around the country, I found the highest percentage of dairymen fall under this category. This type likely has hedging positions on or is looking to add them. Therefore, they tend to monitor those positions as well as the futures prices to find the right opportunity to remove price risk inherent in their business.
These are the dairy producers who are the most forward-looking. If there is a drastic price swing that changes the fundamentals of their business, they are ready to react accordingly. They are chatting with their risk managers multiple times per week to bounce ideas about where prices are going. They can then look at what futures and options positions to take in order to protect themselves against downside milk price risk.
I even know dairy producers that check prices hourly. They may even speculate with their brokers. In other words, they are taking positions outside or above normal hedging activity based on an opinion of future market movements.
This is a very risky practice and is not for everyone. However, for those who know the markets well, it is a good way to diversify revenue streams from the standard milk and cull cow revenues.
Weekly
To step outside of our progressive customer base, it seems this is the group that most dairies would fall into. They may have hedge positions on, but either way, recognize the need to keep an eye on prices. Whether it’s a back of the napkin calculation, a spreadsheet or a margin forecasting program, there is still benefit for the dairyman who checks in weekly.
In talking with clients, some weekly-checkers wish they could monitor more frequently. So they know it would benefit them to be more in the know, but they simply don’t have the time.
This is not the end of the world. It may be a seasonal situation where you may not check for a week or two during a busy time, but can jump back in more actively when things slow down. I would just advise that you don’t let the frequency slip too much. Prices won’t hold off on a big move until you’re finished with planting.
Monthly
If you are not too careful, the weekly camp can fall back to monthly or less. This is where I will make a little stronger of an appeal. A lot can happen in a month’s time. I will give you some examples. Toward the end of 2014, if you had checked once per month, here’s what you may have seen for the cheese block/barrel average spot prices in consecutive months from August to December: $2.45, $2.22, $2.12, $1.67 and $1.46 per pound.
To bring that point home, the change from $2.12 to $1.67 will take over $4/cwt off your milk check in Class III terms. Needless to say, that drastically changes the dairy’s outlook. Making sure you’re aware of these changes is recommended.
Takeaways
Those in the monthly category may be discouraged from checking and analyzing spot and futures prices because they are unsure about how to go about it. No shame in that. The dairy industry has one of the most complex pricing structures of any industry out there. Many dairy farmers are reluctant to admit they don’t know how their milk check works.
How do they get paid? How much more or less do they get paid when prices change? These are difficult calculations to do on the back of a napkin.
Your banker can be a good resource to talk about markets. Even more so, dairy risk managers watch these markets for a living. With the right broker, dairies can make sure to educate themselves on price risk and opportunities before deciding whether to hedge or not.
The first step is to understand the business: cost of production and milk check revenue. Then you can figure out how prices can affect it. Being patient and seeking out knowledge will increase your level of comfort with the markets and you will develop a natural interest in what’s going on in the market.
That interest will drive you to pull up that market-pricing screen more often and bring you more in tune with the fundamentals of your business. PD
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Lawson Thalmann
- Director of Business Development
- Vault Technologies
