Class III and IV $20+ Contract Opportunities:
Managing an Unusually Strong Market
As dairy farmers know better than anyone, the war in Ukraine and inflationary pressures have changed the landscape for Class III and Class IV milk operations. Dramatically rising input costs and significantly higher breakeven costs have led to a tangible contraction in the number of cows. The war in Ukraine has added unavoidable uncertainty for both the availability of feedstuffs and overall global impact on price.
Given market conditions, it may seem like you’re finally in a bullish environment where your focus can be on simply taking the market price vs. managing price. Bear in mind, however, that for all the reasons that milk prices have gone up, they can also go down. The conflict in Ukraine could end. Dairy farms might start aggressively adding more cows to their operations to take advantage of higher prices. Overall demand could fall in the face of higher prices.
Fortunately for dairy farmers, the market is offering up an opportunity that Class III milk producers have seen only rarely and Class IV producers have never seen at all—the ability to lock in $20.00 or higher milk prices up to 16 months into the future. The key for protecting future production is to be aware of the opportunity the market is presenting and being prepared to act on it.
Buyers Offering Up Rare Opportunity for Dairy Farmers
As uncertainty about higher prices increases, so, too, does the need of buyers to lock in long-term prices to add certainty to their input costs and to protect against further rising prices. Buyers do this by bidding futures contracts—at most, 24 contracts are offered on the board at any one time in both the Class III and Class IV markets.
Historically speaking, it is rare for the market to offer milk contracts at $20.00 and up, going out 24 contract months into the future. Nonetheless, right now the market offers milk producers this rare opportunity.
Class III Milk
The following chart shows the number of Class III milk futures contracts that exceeded $20.00 per cwt, and how they compare to the front-month daily close prices, going back to January 1, 2000 (the date Class III milk began trading on the CME).
Remember that there are, at most, 24 contracts offered at any one time. In June 2008, before the market crashed, 19 of 24 Class III futures months closed at $20.00 or higher. Back in June 2014, 7 of 24 Class III futures contracts closed at $20.00 or higher. Currently, 16 of 24 Class III futures contracts are trading at $20.00 or higher.
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Class IV Milk
Similar to the above Class III milk chart, the following chart shows the number of Class IV milk futures contracts that exceeded $20 per cwt, compared to the front-month daily close prices, going back to January 1, 2007. (Class IV milk is a less liquid futures contract, so we have chosen a date for the chart with consistent data.)
Again, there are, at most, 24 contracts traded on the board at any one time. In May 2011, 6 of 24 Class IV futures contracts closed at $20.00 or higher. In May 2014, 9 of 24 Class IV futures contracts closed at $20.00 or higher.
Currently, 15 of 24 Class IV futures contracts are trading at $20.00 or higher—the most ever.
Implications to You
The number of $20.00 and higher futures contracts available to Class III and Class IV producers offer historically favorable prices. This is an opportunity to expand your focus from what you can get today to managing price well into the future.
Farmers who work with Total Farm Marketing can rest assured that we are monitoring the market on a daily basis. We will work with you over the upcoming months to help you determine when and how to take advantage of the opportunities the market provides, and protect against the risk of falling prices.
If you are not a customer of Total Farm Marketing, we encourage you to talk with us today. As you work to manage your farm income, learn how we can help you manage risks and both short-term and long-term opportunities. You can reach us by phone or text message at (800) 334-9779.
Author
Matt Mattke