As another episode of low prices has gripped major agricultural commodities in the United States and around the world, Thomas Paine's observation that 'these are times that try men's souls' applies, according to hedging and marketing specialist Robin Schmahl of AgDairy Inc.
In the face of those price cycle realities, 'marketing is not an option. It's a necessity,' Schmahl told one of the largest crowds ever at the semiannual farm management update for agricultural professionals sponsored by Extension Service offices in east central counties.
A marketing or pricing program is likely to reduce price risk for agricultural commodities but it definitely will not solve price volatility, Schmahl emphasized. While not intending to make light of the situation, he quipped that farmers could figuratively have used a semi, pickup truck and bike for taking their money to the bank in 2014, 2015 and 2016 respectively.
'The market doesn't care who's in business. We have to be frank with ourselves,' Schmahl said. 'The market does what it does. Facts are facts.'
Dairy in the doldrums
'Dairy is the most negative' among the agricultural commodities today, Schmahl stated. 'Cow numbers are the key. In the United States, they're 9.326 million — the highest since December of 2008.'
At the moment, the spot market price for Cheddar block cheese ($1.3050 per pound on May 6) at the Chicago Mercantile Exchange has fallen to what it was in March of 2010. Virtually no one was expecting such a low price now, he commented.
Class III milk futures for nearby months have fallen below $13 per hundred – in contrast to prices at $17 per hundred at which dairy farmers could have protected prices for most months in 2016 with a hedging or simple put option strategy two years ago, Schmahl pointed out. Even lower numbers available more recently in the $16s, $15s, and $14s per hundred for nearby months would look attractive now.
Schmahl bases his argument for having a marketing strategy on those numbers and the opportunities they once presented but which are no longer available today. He said there's nothing he'd advise for nearby months, but it could be worth considering put options for prices in the $15s per hundred for months in late 2016 and early 2017.
Email advice center
Whenever milk prices hit a low point, Schmahl gets emails with a variety of advice on what to do. One recent email sender suggested that all herds of more than 300 dairy cows be banned, he reported.
While the negative emails show that there 'is hurt out there,' Schmahl noted that farms are businesses which often decide to expand and that they are free to do so. The result at the moment is that milk production in March was up by 1.8 percent compared to a year ago and that inventories of cheese area approaching the record high set in 1984 – just before the national dairy herd buyout program. But the 1984 numbers aren't exactly comparable because of the increase in the volume of cheese sales since then, he said.
With the prospect of the national all-milk price for 2016 averaging about $14.50 per hundred, Schmahl finds some evidence that dairy farmers are becoming more active in culling cows which are not providing a profit. But in many cases, they are merely making room for replacements, thereby maintaining the size of the nation's dairy herd.
No international relief
Around the world, milk production for the current year is running 1 percent above that of a year ago in the major dairy countries, Schmahl indicated. A related factor is how the export market volume has fallen for the past two years, he added.
Part of the squeeze on dairy exports is due to Russia's embargo on imports of agricultural products from most countries in the European Union and Australia, Schmahl explained. Even before that embargo began, Russia was not accepting any imports from the United States.
With those countries having a portion of their previous dairy export volume displaced, the United States faces 'very strong competition' for butter and milkfat sales. He noted that this is doubly difficult because of the world price of $1.18 per pound for butter compared to the recent $2.04 spot market price in the United States.
Schmahl believes that the experience of having butter briefly topping $3 per pound with the past two years has prompted some buyers to hold excess stocks in reaction to fears of another episode of such a price. On the other hand, the United States price of about 75 cents per pound for non-fat dry milk matches today's world price and is very favorable for export sales, he added.
Grain market outlook
Recent price bumps in the futures markets for both corn and soybeans provide another example of how taking advantage of marketing strategies can greatly benefit the producers, Schmahl stressed. He wonders how many of them locked in somewhat better prices in recent weeks but fears too many did not.
Schmahl advised the dozens of agricultural lenders and others in the audience who offer advice to farmers to ask, prod, and even nag them to consider making use of such opportunities. 'Farmers are good at production but not marketing,' he said.
There's also too much of a mindset clinging to the belief that if the price of a commodity reaches a certain number it's also likely to go another 50 cents to $1 a bushel higher, Schmahl stated. Too often, this leads to a decision not to sell and the loss of an opportunity, he commented. He believes too many soybean growers are content to have a few shiny bins filled with the crop rather than emptying those bins.
The recent price hikes pushed corn futures to $4.10 per bushel and soybeans up to $10.28 per bushel in late April. Schmahl cited both AgDairy and U.S. Department of Agriculture predictions of 2016 average cash prices of $3.45 per bushel for corn and respective estimates of $8.70 and $8.50 per bushel for soybeans.
At approximately those futures prices, Schmahl suggests considering a put option, which leaves a price upside open, at a cost of 25 cents per bushel, or a put and call option combination at $3.80 and $4.40 respectively per bushel at no net cost. An enhancement would be to scale up should the futures price top $4.10 per bushel.
For soybeans, Schmahl would obtain a put and call combination at $10 and $11 per bushel for a net cost of 10 cents per bushel, buy a put option at $9.80 for a 34-cent premium, consider selling a call at $12 and scaling up for any 20-cent gain above $10.
Winter wheat woes
Schmahl described the outlook for winter wheat prices 'a tough one' in part because of very high global stocks, a harvest somewhere in world during 11 months of the year, and a generally good early season condition of the 2016 crop in the United States.
With cash price projections of $4.20 to $4.50 per bushel for the 2016 crop, Schmahl suggested selling at harvest, buying a call option to create the opportunity to re-own the crop, or combining a September futures price of $4.70 per bushel on a put option and $5.30 on a call option for a net cost of only 2 cents per bushel.
Schmahl can be contacted by phone at (877) 256-3253 or by email to firstname.lastname@example.org. He has a website at www.agdairy.com.