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Guidelines to Consider When Contracting Milk Futures

Knowing your budget is essential for dairy producers, especially coming off a record-high milk price year. During a Dairy Defined podcast, Peter Vitaliano, chief economist for National Milk Producers Federation (NMPF), shared that the futures are indicating about $3.50/cwt. lower average price in 2023 compared to last year.

Gary Sipiorski underscores the fact that risk management programs are made to help create stability and lock in a return. He encourages producers to take a hard look at both Dairy Revenue Protection (DRP) and milk futures and begin those conversations with outside team members today.

According to Sipiorski, only 10% of dairy producers purchase milk futures, but believe that risk management discussions should be happening on every single farm.

“The top 30% of dairy producers in the U.S. earn $1.25/cwt. more compared to the average producer. This is a good time to get your financials together and sit down and talk about risk management,” he says.

Three Tips

Penn State Extension offers the following guidelines to be considered in developing a personal marketing strategy for using milk futures:

Don’t lock it all in. Set a minimum and maximum volume of milk to contract each month. If you are new to contracting or have low debt levels, consider less than 50% of monthly production. If you are more experienced and have a higher level of debt, consider a maximum volume of 60-80%.

Don’t concentrate on near-term or far-off contract months. Given lags in the pricing system, worrying too much about contracting next month’s milk production does not make sense. Also, contracts nine months out and beyond are very uncertain. There aren’t many contracts traded for those outer months, so don’t concentrate on those either.

Lock in more contracts as prices rise. You may decide to contract 30% of your future milk production today. If contract prices rise for that month in the days ahead, then contract an additional 20-30%. This method will allow you to average into a strong price. While you are doing that, don't forget about contracts that are four to eight months out. Those contract months typically do the best in making positive returns when short-term cash markets are rising because strong cash markets today have a positive effect on all contract months.

Minimize your dairy’s risk in 2023 and begin those much-needed risk management conversations today.

January 27, 2023


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