COLUMBUS, Ohio A new
fluid milk contract holds promise,
but dairy producers and proces
sors should be cautious if they use
the new dairy futures market as a
price risk management tool, said
Cameron Thraen, Ohio State Uni
versity agricultural economist
While ffitures contracts for
com, whdat, soybeans, beef, pork
and other agricultural commodi
ties have been available for many
years, the cheese and fluid milk
contracts are relatively new.
Dairy farmers can avoid much
of the risk of cash prices falling
before their milk is ready to sell by
hedging in the futures market or
entering into a forward price con
tract with a processor. In return,
dairy farmers give up the chance
of hitting the jackpot should prices
rise.
Hedging offers producers a
more stable, guaranteed return by
shifting the risk of price change
off to a speculator, Thraen said.
Dairy handlers and processors
also can protect against adverse
price changes on raw milk inputs
and finished products.
But to be a useful price risk
management tool, the commodity
prices on the futures market must
reflect the changes that occur on
the cash market. This doesn’t
always happen with new contracts
and hasn’t happened with raw
fluid milk contracts that began
trading ip December 1995 on the
Sugar and Cocoa
Exchange and in January 1996 on
the Chicago Mercantile Exchange,
Thraen said.
“Both of these original fluid
milk contracts were not a good
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MEMBER FDIC
Dairy Futures In The Dairy Industry
way to hedge price risk, because
there was not a reliable link
between the two markets,” he
said. “If cash prices go against
you, there’s no guarantee the
futures contract would work for
you, which is the essence of a
hedge.”
The fluid contracts include a
physical delivery provision that
has caused problems. When the
contract, is up, actual delivery of
milk has to take place between the
seller and the buyer. Someone
who has agreed to take delivery
could end with tanker trucks of
milk and have no idea What to do
with them, Thraen said.
To solve this problem, the
CSCE began trading a hew fluid
milk contract on April 8 with a
cash settlement provision. This
new contract a Basic Formula
Price or BFP contract differs
from the original by allowing the
contract to be settled between par
ties in dollars for what the milk is
worth, rather than worry about
giving or receiving actual milk.
“This new contract is exciting
to watch, and there has been a lot
of activity with it,” Thraen said.
“This activity could be an indica
tor that the trading community
thinks the new contract has cor
rected the problems of the older
ones."
But, the new contract has only
been trading for a little more than
a month, and producers should be
cautious with a contract that has
been trading for such a short time,
he said.
A cheddar cheese futures con
tract has traded on the CSCE since
June 1993, and, in contrast to the
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early fluid milk contracts, is per
forming well. Thtaen’s research at
Ohio State shows there has been a
good tie between the price
changes on the futures market and
the cash market for cheese. It
appears this contract may be a
good way to manage price risk for
cheese processors, Thraen said.
He is currently investigating alter
native strategies processors could
use on the cheese futures market.
The dairy industry turned to
futures contracts as a way to hedge
ITHACA. N,Y. Northeast
DHIA, a perennial leader in pro
viding timely herd management
data, now offers its members dair
ies quicker access to milk compo
nent results. Hods that sample for
SCC can receive Northeast
DHIA’s SCC Quick Sheet as soon
as the samples have been
analyzed.
The SCC Quick Sheet consists
of two reports. The first report
lists all cows with a linear score
value of 4.0 (200,000 raw count)
or greater, listed in order of high
est linear score to lowest The sec
ond report lists all cows sampled
in milking pen order, with aver
ages for each pen and averages for
the entire herd. In addition to
SCC, both reports also list Bam
Name, Pen, Lactation Number.
Days In Milk, Pounds of Milk,
Percent Fat, Percent Protein,
Linear Score, Previous Linear
*
Boh Zook. I T
lg Lending
Serving
farmers
since
1881
Northeast DHIA Offers Quicker
Access To Component Results
against variable prices after gov
ernmental price supports for dairy
essentially ended with the passing
of the 1996 farm bill. The federal
government had stabilized milk
prices since 1949 by either buying
surplus dairy products when
prices got too low or selling surp
lus dairy products from federal
stocks when prices went too high.
‘Today’s milk prices are much
more variable than they used to
be,” Thraen said. “As the govern
ment gets more and mote out of
Score, and Average Linear Score
for the Lactation.
What makes the SCC Quick
Sheet unique is that it can either be
mailed or faxed to members
directly from the milk analysis
laboratory. For most members,
this means having component
results within 24-48 hours of
Show Set To
ENGLEWOOD, Colo.
Entries are in and the 1997
National Junior Limousin Show
and Congress in Louisville, Ky.
July 7-12 has all the makings to
break records and become the
largest Limousin junior gathering
ever held in the United States.
All told, show entries have been
recorded for 416 females, 44
steers, and 21 bulls. Those num
bers could made the show the
largest National Junior Limousin
Show ever held.
“It is exciting to see this many
young people showing enthusiasm
for Limousin and the cattle indus
try,” said George Hubbard, North
dairy price risk management and
support, it is important that the
dairy industry learns to use the
futures market to manage price
risk.”
Once the new fluid milk con
tract has been around long enough
and Thraen is confident the
futures prices reflect the activity
of the cash market, he plans to
research what strategies dairy pro
ducers should follow to effective
ly hedge their price risk.
when the samples were taken.
Dairy One assured. Northeast
DHIA Farm Services strives to
provide more substance to its
members dairies. For more infor
mation about the SCC Quick
Sheet, contact Northeast DHIA
Farm Services at 1-800-344-2697
ext. 1.
Break Records
American Limousin Foundation
(NALF) director of junior
activities.
The 258 exhibitors will bring
together 28 states for competition
in shows and satellite events,
including public speaking, sales
talk, cow camp and judging con
tests. States will also compete in
the Limousin Beef Cook-Off,
herdsmanship, and booth contests.
For more information on the
National Junior Limousin Show'
and Congress or the Limousin
breed, contact NALF at (303)
220-1693 or e-mail at
NALimousin@aol.com.
'»