Falling prices: Now what?

Editor’s note: Matt Mattke, Market360® adviser at Stewart-Peterson, is a regular columnist in Midwest DairyBusiness. Contact him via e-mail: mmattke@stewart-peterson.com, phone: 800-334-9779 or visit www.

Q: Over the last two months, milk futures have experienced a tremendous price drop, with $20/cwt. replaced with $16/cwt. I have no future milk production sold for 2008 or 2009, but I’m very concerned prices could keep falling into territory that is unprofitable for my business. What should I do?

A: 1. Do not panic and make some emotional marketing decisions you will regret later. At the time of writing this article (Aug. 25), milk prices have already fallen 25% (or about $5/cwt.) from their high, in about a two-month time span. After a price drop of this magnitude, a $1-$3/cwt. correction higher is very possible, and you need to prepare to take advantage of such a rally. It is imperative you do not let any $1-$2/cwt. rally go unrewarded in this market.
2. Any immediate downside price protection strategy you implement should be put options only. These put options will provide you the immediate benefit of a price floor in case prices continue dropping, but give you the ability to participate in higher prices. In the event milk prices do make a $1-$2/cwt. correction higher, you can swap out your put options for forward contracts or sold futures. This will allow you to take advantage of the rally, while improving your price floor above the price level the put options would have provided.
3. Sell into each $1/cwt. rally in 25% increments and focus on contracting out 12 to 15 months of milk production. The milk market is likely in a bear market, and lower trending prices could continue through 2009, so establishing longer-term price protection is important.
Unfortunately, there is no profound strategy that can recreate $19-$20/cwt. milk for your operation. The best decisions you can make at this time are to get downside protection in place in a manner that leaves your upside open, and then roll that protection up on a rally. Price corrections higher in an overall down trending market can be quick and sharp, so it is important you get your marketing strategy in place and watch this market extremely close. Opportunities will come and go quickly, and a quick upward correction to $18/cwt. milk could end up lasting only part of a day. If you do not have the time to keep up with this volatile milk market, consider delegating the task either to someone else in your operation or an outside professional.
■ To have your marketing questions answered in this column, contact Matt Mattke, Market360® adviser at Stewart-Peterson. Contact him via e-mail: mmattke@stewart-peterson.com, phone: 800-334-9779 or visit www.