A Larger Dairy Herd May Limit Future Price Rallies

What Happened

The November USDA Milk Production report, which covered October 2024 milk production activity, confirmed what many were anticipating: more milk cows. A strong price advance for the second half of 2024, where futures contracts gained more than 20%, was likely enough incentive for producers to build the herd. This was echoed when the Nov. 20 report indicated that cow numbers in the top 24 producing states had increased by 21,000 compared to October 2023. Total numbers in the survey are now estimated at 8.92 million. Production per cow in October was at 2,013 pounds, a 4-pound increase from October 2023.

Why This Is Important

The report indicated dairy producers responded to higher prices. It didn’t take long for prices to retreat $3–$4 after futures peaked in early fall. The impact of the supply increase may make it more difficult for prices to rally in the future. When they do rally, it may be short-lived. The dairy industry has a history of responding to higher prices with more production. The key for producers is to become risk-shifters and develop a strategy to defend price rallies as they happen. Forward contracting, buying puts, and hedging (selling futures) are good tools that shift risk. Each strategy has its own merits.

What Can You Do?

Use history as a guide. Take action when futures reach high enough levels. An example of this would be milk prices in the mid-$20 range, a lofty level that tends to be short-lived. Using the right tool at the right time is paramount. However, knowing with certainty the right tool for you and when to implement it can be a challenge. Consider using a diversified portfolio that would have a combination of forward selling, hedging, and purchasing put options to establish a price floor. A more advanced approach is a fence option strategy, which involves purchasing a put option and selling a call option. The fence option strategy fences in a range of prices. Both futures and sold options are marginable positions with unlimited risk.

As with any strategy, make sure you have a clear understanding of expectations and risk before you enter any position. Your advisor can help guide you through the process. As a dairy producer, your job is not only to be a producer, but also a risk manager.

Find What Works for You

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation rather than emotionally charged responses to market moves, which are always dynamic.

Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you may make to buy, sell, or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.