If you have been monitoring milk prices on the futures market, you are likely aware that they are quite high. For example, the contracts for Class III milk for September, October, and November have recently been trading around the $22 per hundredweight (cwt.) mark. Given that such high prices are uncommon, farmers may have an opportunity to manage risk by locking in or hedging milk prices. Below are some principles to help you understand how to lock prices in the futures market.
Locking a price means that the farmer chooses a price at which they would like to sell their milk, ensuring that the final selling price matches the one they selected. For example, suppose a farmer sells a futures contract of Class III milk for November 2024 at $21.79 per cwt. If USDA announces on December 4, 2024, a Class III milk price of $18.73 per cwt. due to a hypothetical market downtrend, the farmer would gain $3.06 per cwt., or $6,120 per traded contract. While the farmer gains in the futures market, they would also receive less money from the milk check due to the lower market price.
Sept. 2, 2024
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