Dairy Policy & Economics
December 31, 2009
Dairy Market Update: What a Difference a Year Makes
By Bob Yonkers, IDFA Chief Economist, Ph.D.
As the year comes to a close, dairy markets have rebounded to high price levels not seen prior to 2007's record highs, except for a few months in 2004. What a difference from last year at this time, when dairy markets experienced significant price declines, and many dairy producers were already struggling with declines in profitability or were expecting them soon.
The dairy markets of the past three years are likely the first of many periods to come where prices zoom to high - even record - levels, only to fall dramatically to very low levels. As result, some in the industry are proposing that our government attempt to predict and regulate how much farm milk may be produced and marketed, farmer by farmer, to meet demand forecasts. Others are opposed to efforts to expand government intervention in our industry, as they see enormous opportunities for growth, both domestically and into new and expanding export markets. They are willing to accept the lows in order to benefit from the highs.
The key question is how to structure and operate a farm or food business while facing the swings in market prices like those of the past few years. Recognizing that price swings are an expected part of their businesses, producers and processors of other agriculture commodities have long used forward contracts and futures and options for price risk management. Yet many in the dairy industry have been slow to adopt those practices.
The past year is a great example of why such tools should be considered as part of a marketing plan for any dairy farm, processor or end user of dairy products. Any dairy business whose economic survival was in question during the past year's low milk prices and higher-than-average feed and fuel costs needs to prepare for such a period to occur in the future.
The excuse many have used for not protecting their businesses from price risks - saying that the industry has never experienced conditions like the past year - is no longer valid.. And the business management tools are available to the dairy industry.
The 2008 Farm Bill renewed what had been only a pilot program between 2000 and 2004 to allow the use of forward contracts for farm milk under federal order regulation. And the number of futures and options contracts traded for dairy continues to grow as others make greater use of these risk management tools. If you have not seriously considered their use before now, make this New Year the time to start.
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