By Matt Mattke
Q: Grain prices have fallen tremendously over the last month. If this trend continues will that put additional pressure on milk prices? If so, should I be forward selling my milk?
A: Be careful about making a decision about whether to forward sell your milk based solely on falling grain prices. High grain prices this past year didn’t stop milk prices from falling; who says low grain prices will keep milk prices from rallying?
In the past there have been a number of rallies in milk prices when either grains were low, or grain prices were falling. Corn and soymeal prices still have a long ways to fall yet before prices even return to their longer-term averages. On corn the long-term running average price is $2.29 futures, and on soybeans it’s $5.53 futures.
The latest USDA Agricultural Prices report showed a milk-to-feed price ratio of 1.45 for June, based on a $4.03/bushel corn price, and a milk-to-feed price ratio of 1.65 for July based on a $3.33/bushel corn price. This milk-to-feed price ratio is still historically low and a far ways off from a more neutral milk-to-feed price ratio in the 2.50-3.00 range. In the table below are some different milk-to-feed price ratio possibilities based on lower grain prices.
The calculations show that even if corn falls to $2.00/bushel, hay to $100/ton, and soybeans to $6.50/bushel, an $11.30/cwt. all-milk price still will not return the milk-feed price ratio back to the more neutral 2.50-3.00 range. At those feed prices, there would need to be a $2.70 higher all-milk price than the $11.30/cwt. that producers are currently getting to get the milk-feed price ratio almost to the 3.00 level.
Historically, the time span between the last time the milk-feed price ratio was at 3.00 and then returned back to 3.00 has ranged from 18 months to 23 months. The last time the milk-feed price ratio was at 3.00 was November 2007, and currently July 2009 is the 20th month since then. Based on historical milk-feed price ratio cycles, the all-milk price is due for a rally, even if corn prices and soybean prices do tank to $2.00 and $6.50 per bushel, respectively.
The bottom line is that the decision to sell or not sell milk at this time should be based on other factors and not based on the anticipation of falling grain prices.
Stewart-Peterson Market360® Adviser
Web site: www.stewart-peterson.com.