Several months ago, I wrote an article discussing the relationship between milk price and several economic factors to determine if there was a correlation between these economic indicators and the Class III milk price. This article is a follow-up to my last piece as I drill down further into some agricultural factors and prices to see if there are any better correlations and indicators of the upcoming milk price.

With the high level of volatility in milk prices in recent years and even recent months, many people look to other economic indicators and indexes to see if a pattern exists. In order to get an idea of any correlations, I tracked milk prices with the consumer confidence index, crude oil price, gross domestic product and disposable personal income.

Recently, the Class III futures for the upcoming months trading on the Chicago Mercantile Exchange (CME) have experienced some downward volatility that has eroded much of the narrow profit potential for dairymen.

In recent years, higher and more volatile feed prices have made it difficult for producers to predict their profitability by looking at milk price alone. While the milk price trading on the Chicago Mercantile Exchange (CME) has historically been a good indicator, it only shows part of the picture.

I know you’ve heard it before but, given the current volatility in both the milk and feed prices, I thought now would be a good time to review the importance of hedging the milk-feed margin. Some of you are more familiar with hedging your milk price, while some may be more familiar with hedging feed prices.

As I travel across the country and talk with dairymen, there is a growing interest in risk management, and buying put options are overwhelmingly the favorite strategy. Producers are attracted to this strategy because it is flexible but still offers price protection if the market should decline. Along with producers, I hear a lot of interest in this hedge strategy from lenders, accountants and other industry professionals. In order to give you some perspective on this hedge strategy, below is some historical information.