Markets are in turmoil. Panic has set in with real concerns worldwide that the continuous spread of the coronavirus will put the economy in a recession. Markets are in a strong sell-off as there is a “risk off” tone, with positions being sold to move money over to cash or other safe assets. From a short-term perspective, conditions look bleak and there could be more downside pressure to come. However, taking a step back and looking at the value of current input costs like fuel, corn, and soybean meal, paints a much different picture. Dairy producers could consider this a macro buying opportunity to lock in purchases for the next year or two.
Let’s start by looking at the price of corn. The markets are moving fast, and volatility is high. So far, the March low has come in at $3.32 per bushel on the May 2020 contract. This is the lowest price for front month corn since August 2017 and is right near the bottom end of the range for corn over the last decade. Yes, market conditions look bleak and corn could continue lower. Still, look at the value here. Locking in input costs at prices near decade-lows can be a great strategy – especially with a planting season right around the corner. We expect upside volatility to increase over the next few months, as the markets turn their focus to weather. Consider taking advantage of this buying opportunity before planting gets underway.
Next, the fuel market has sold off the most of these three commodities and is trading at its lowest level since 2016. From the January 2020 high to the recent March 2020 low, front month heating oil is down a remarkable 55.50% over the course of three months. Prices are now below 2008/2009 recession levels and are right near decade-lows. With the market at these levels, dairy producers could be able to lock in diesel fuel for a year or two below $2.00 per gallon. A great way to start is to call around and talk to suppliers to get quotes. Ask how far out you can book fuel needs and consider booking what you feel makes sense for your situation.
Finally, the soybean meal market is one that hasn’t been affected much by the coronavirus sell-off. Still, we believe the value at current prices is good. Soybean meal has traded in a historically tight range for almost a year and a half now. Throughout the majority of that time, the front month contract has hovered right around $300 per ton. In our experience, this has been a great buying opportunity for protein over the past few years. Depending on your situation, consider taking advantage of this level again, while the market is trading just above that $300 per ton level. If issues arise, you could consider booking your feed in the cash market. You could also consider call options or futures in a hedge account to help manage price risk. Look closely at your situation, and evaluate the use of these tools.
The coronavirus sell-off of 2020 is keeping pressure on the dairy market. This could lead to lower milk production revenue for 2020 than what was projected just a couple months ago. Consider doing what you can to keep margins as wide as possible by locking in input costs at levels near decade-lows.
Contact us at Total Farm Marketing for an initial consultation if you are interested in working with one of our advisors to address your long- and short-term marketing needs.
© 2020 Total Farm Marketing
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