Futures markets remain foggy
Maggie Gilles, Kansas Dairy Farmer
December 10, 2020
As the wild ride that has been 2020 comes to a close, dairy economists have their eyes directed toward what’s in store for 2021. During the December 9 Hoard’s Dairyman DairyLivestream, presenters placed some analysis to what’s expected in the coming year. For the most part, next year’s markets appear to be more or less a mystery.
“Right now, when you look at Class III and IV futures markets for the year out, it’s surprisingly flat, and Class III is flat around the $17 range,” shared the University of Wisconsin-Madison’s Mark Stephenson. “I suppose those numbers are maybe just saying we don’t forecast any real choppiness out there in the waters.”
While that’s a possibility, Stephenson isn’t predicting that 2021 will be a steady year for milk prices. Instead, he proposed a contrary hypothesis.
“It could also be because your instruments are broken, and you’re not reading things very well,” he said of futures forecasts. “I think these flat curves are reflecting a naïve forecast. We don’t really know; there’s a lot of potential risk out there, but we can’t really see the things or have keen insights into what we think are going to drive these prices any more than just a month or two in advance.”
A lot of that fogginess in futures markets was attributed by the panelists to the impacts of COVID-19 and subsequent government programs that purchased dairy products, especially cheese.
It’s hard to see The flatness of futures markets also presents a difficult position for dairy farmers who use the tool to manage their risk.
“It makes it harder to find what may feel like real opportunities in a program like Dairy Revenue Protection (Dairy-RP) where you have to look forward through futures market prices,” the seasoned economist explained during the webcast sponsored by Diamond V. “So, you may not perceive much in the way of real opportunities out there, and it’s about more level securing the risks that you have.”
To that end, Stephenson encouraged listeners to look at programs that manage marginal risk and consider protecting themselves that way as much as possible. He specifically mentioned the Dairy Market Coverage (DMC) program as a good option to consider this year.
“If you’re a larger dairy farm than say a few hundred cows, then maybe you want to look at options that may present themselves going forward through this year, but we just don’t have enough information to move markets right now,” he concluded his thoughts on the topic.