The November USDA Milk Production report for October 2024 has shed significant light on the dairy industry. It revealed a notable increase in the number of milk cows, with futures contracts surging by more than 20%. This surge in prices provided the necessary impetus for producers to expand their herds. As indicated by the Nov. 20 report, cow numbers in the top 24 producing states rose by 21,000 compared to October 2023, now estimated at 8.92 million. Moreover, production per cow in October reached 2,013 pounds, a 4-pound gain from the previous year.

Why This Matters

This report clearly shows how dairy producers responded to higher prices. However, it didn't take long for prices to retreat by $3 - $4 after futures peaked in early fall. The increase in supply may pose challenges for future price rallies, making them more short-lived. The dairy industry has a long history of responding to higher prices with increased production. Producers need to become risk-shifters and develop strategies to defend against price rallies. Forward contracting, buying puts, and hedging (selling futures) are effective tools that can shift risk. Each strategy has its own advantages and considerations. 1: Forward contracting allows producers to lock in prices for future deliveries, providing a sense of stability. Buying puts gives them the right to sell at a predetermined price, protecting against price declines. Hedging through selling futures helps offset potential losses. These strategies require a careful understanding of market dynamics and risk management. 2: By using these tools, producers can navigate the volatile nature of the dairy market. They can balance the need for higher prices with the risk of oversupply. It's crucial to assess the market conditions and choose the most suitable strategy based on individual circumstances.

What You Can Do

History can serve as a valuable guide. Act when futures reach high levels, such as in the mid-$20 range for milk prices. This is a lofty level that often doesn't last long. Using the right tool at the right time is essential. However, determining the right tool and the optimal timing can be challenging. Consider adopting a diversified portfolio that combines forward selling, hedging, and purchasing put options. This creates a price floor and provides some protection. 1: A more advanced approach is the fence option strategy, which involves buying a put option and selling a call option. This strategy fences in a range of prices, providing a buffer against market fluctuations. Both futures and sold options are marginable positions with unlimited risk, so careful monitoring is required. 2: When implementing any strategy, it's crucial to have a clear understanding of expectations and risks. Your advisor can play a vital role in guiding you through the process. As a dairy producer, you need to be not only a producer but also a risk manager.

Finding the Right Strategy

Work with a professional to identify the strategies that best suit your operation. Communication is key. Ask critical questions and gain a comprehensive understanding of the consequences and potential rewards before taking action. The goal is to make informed decisions based on a thorough analysis of the market and your business needs. 1: Emotions should not drive your decisions in the dynamic market. Instead, rely on a well-thought-out strategy that takes into account various factors such as market trends, supply and demand dynamics, and your risk tolerance. 2: By collaborating with a professional, you can customize a strategy that aligns with your goals and helps you navigate the challenges of the dairy market. It's an ongoing process that requires continuous evaluation and adjustment.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 30 years of experience at Total Farm Marketing and a wide network across the Grain Belt, Bryan Doherty is deeply committed to his clients' success and building long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty is passionate about farm marketing. He has an in-depth understanding of the tools and markets and communicates with intent and clarity to ensure clients are confident in their decisions.