Yes, that would be another way of doing it (forward contracting). The way I am speaking is you hedge against yourself when prices are very profitable. For example, when the price was at $20.60 back in Dec of 07 (as stated in this article), you could hedge against that by opening put contracts at say $16.00 (the break even number) that are OTM (that is option term for: Out of The Money). If you opened contracts that far OTM, the premiums would cost you very little, and by the time the price fell to $9.00-10.00 those contracts would be up at least 10 fold (1,000+% or better all depending what the premiums cost). What is real nice with options is that, the bigger the crash is the more your put contracts are worth; as of course the puts give you the right to SELL at the price you opened the contracts at regardless where the price currently is trading.
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Many airlines and shipping companies employ this strategy in reverse with fuel costs. Like right now, you can lock in low oil prices by buying long term calls that are far OTM right now. If oil goes through the roof again, you offset your operating costs by the the $$$ you made off your call contracts. It can become a big game of math; as you have so many ways of hedging with options with so many different strike prices, and time durations available, but it really can save a lot of heartache when prices suddenly crash (or sky rocket).

Yes, some dairy producers (of all sizes) do forward contract their milk, but it has yet to really catch on. Milk prices had stayed relatively healthy for most of 2007-08, so many producers probably were lulled into just thinking it would remain above the cost of production. The downturn came rather sharply this time.

CBOT does cover futures on milk tied to cheese production and some dried milk. I am sure corporate farms use it to some extent but you would think that milk producers organizations would try to use it to aid their members.

Look to the left side for other CME products.

http://www.cme.com/trading/prd/ag/milkcl...

farmdude:
That is a very excellent analysis of the reason for the price decline. That is deflation in a nutshell. I assume you are in the farming industry. Do any of the bigger operations hedge on CBOT? If $16 is the break even price, I'd think you could have bought put contracts with a strike price right at the $16 break even level back when the price was at or near $20. I assume you can buy longer term leap contracts (with a 6-12 month time frame) like you can with any major stock or commodity. When the price dropped down to $9-10 those puts would be up a MASSIVE amount, and compensate the losses you take from the now horrible market prices (horrible for you as the seller of course).

Milk dumping was also done in the year 2000, milk prices were as low then as they are now. It sucks! Thank you farmers, hang in there!

Do any farmers hedge by playing put contracts on the CBOT? When the price was so high in Dec 07, I'd think you could just use the options market as insurance on yourself from a big crash in prices. That is often the strategy many businesses will employ to level out commodity prices in a volatile market. Many investors also do that in the stock market if you hold a stock that made a big run up, you simply insure it by buying put contracts, so if you have a big market crash, you won't be hurt as your put contracts will often be up 3-10 fold; which will equal out the losses you took from the crash. It's really not as complex as it may sound if you understand options; and often saves one a LOT of heartache.

schulist, One reason some farms buy hay from out west is because their crop ground is good so they grow corn, not hay. Or maybe they wanted dry hay which is better from dry climates. Or they just don't have enough crop ground to grow enough hay for their cows. There are lots of possible reasons.

Guess no one can tell me why WI Farmers buy hay from out west?

SarahB "Many of the rest of us do have the government to fall back on; it's called unemployment benefits."

Actually, the state only aministers the unemployment compensation fund:

"The principal source of revenue for the Fund is quarterly
unemployment taxes paid by the approximately 124,000 employers subject to the
taxing provisions of ch. 108, Wis. Stats."

docholiday... Be carful next thing you now prices will go up and these 20 people will blame GM or Bush or Obama oh hell I cant figure out who they are blaming any more. I hope the cows dont get a INCREASE in there feed cause if they do that will be all these 20 gazzette fans will be crying about. "FREEZE THE COWS HAY""ITS NOT FAIR"

You crack me up!! HA HAHAHAHA... I think I peed a little. Good one

Milk prices are low because of the dang United Cows Union. Those cows don't work hard have zero skills. They take 7hr. lunches. Then they want government subsidies when it rains too much or not enough. Farmers getting paid not to grow crops. Maybe they should go back to school and learn a skill. Damn Cow Union.

Almeg,the dumping of milk happened in the 80's.

Wonder if we only bought milk from Southern Wisconsin farmers? And every region did the same thing. By calling the company on your milk jug, you can find out where they get it from. Or call the grocery store, and ask them to sell foods that support local farmers and ag producers. At least feature them - with a sign that says "locally grown". Woodman's carries 10+ different kinds of blue corn chips, but only one kind, organically grown, I might add, supports a local farm family - and that is Blue Corn Farms by A-Maize-ing Corn Products. As a community, we need to support each other, and farmers, the ones that have always, and will feed us into the future, need our support now more than ever.

You are so right Cvtdanelvr! I grew up on the above mentioned farm and know what it takes to keep a farm going. Its either go big or go out. Cows don't take vacations or sick days. These farmers are milking three times a day. How many people would do this plus take a pay cut?

........and things are actually worse for California's dairy industry right now. There's talk of a major sell-off of dairy cattle in the next couple of months, would could cause a dairy shortage. Then look for the prices to bounce back up.

Here's the scoop. A year ago there was incredible demand for dairy products, largely because we were exporting about 10 percent of product outside of the United States. This was due to things like a weak U.S. dollar, reduced production from major milk exporters like Australia and New Zealand, and generally stronger demand from developing nations who saw millions of people joining the middle class and adding more protein to their diets. In late 2008, when the economy crashed, so did the milk market. As the U.S. dollar strengthened, all of our farm commodities became less affordable to other nations. That cut into our export sales. Now the U.S. market is flooded with dairy products, and buyers wait until the last minute to fill their orders (instead of storing cheese in a warehouse) because they know there is plenty of product available. Furthermore, as the economy sinks lower, people eat out less, and that cuts into cheese (pizza) sales. Hopefully farmers have enough cash reserves to ride out this storm.

I agree, tjncj, the pricing system as you describe it is unfair and should be corrected to level the playing field. I answered California only because I know they are another source of milk and that is what you asked me. There is no implication that they are better at making money than Wisconsin farmers in that statement. At least none was intended.
No need to apologize. I didn't take any offense to your responses and I understand that there are people who feel more passionately about this subject than myself.

Here is my deleted comment with "butts" inserted for the less correct version that was in my first post:

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JCK-You answered California to my question as if they knew how to make money and farmers here do not. But why should they be given a distinct advantage that our political system will not correct? I spent many years watching people work their "butts" off trying to make a living. Never having a day off, never taking a vacation, putting up with weather and illness and disease only to be priced out of business by the system. I am a little touchy on the subject. I apologize.

Oh and the City deemed the center of the dairy industry in 1937 and used to this day to determine pricing is Eau Claire, not Wausau. Wisconsin has lost $1.2 billion already since the collapse.

It's very obvious that some of you have never spent a day of your life outside of the city. Shame on you - you are alive because farmers, not just dairy farmers, make food for you. All your veggies you buy in the produce section? Farmers. Fruits and whole grains? Farmers. Meat? Your Big Mac and KFC? Farmers. Every food you put into your mouth (minus twinkies) stems from some root of the farming business. The human population would not be where it is now if it weren't for honest farmers working hard to supply food and nutrition products. Ignorance is bliss.

Didn't this happen a few years ago too? The farmers were dumping the milk rather than selling it for a loss. Anybody remember that?

Again the farmer gets the short ride. if the price is lower than lets see it at the stores.

I don't recall saying California farms should receive more for their milk because they are further from Wausau. And I don't recall saying that I am "looking forward" to the failure of small family farmers. :insert confused guy here:

I understand agricultures' place in the Wisconsin economy. But I buy my milk at the grocery store so I guess you could say that they decide who gets supported.

JCK, Why should California farmers receive more for their milk because they are farther from Wausau? That is how the pricing system works. The corporate farms in California would have a tough time living on $10.50 milk. Don't worry the small dairy farms are falling at a huge rate so you can always look forward to that.

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Mark707 -The herds will be culled for underproducers. I remember back in the 70's when farmers dumped milk and had "calf shoots" to protest pricing. They'd dig a hole and march dairy heifer calves up to be shot and fall into the hole. Why feed them if they will be worthless in a year.

JCK-I'm sure if you're informed or not, but agriculture accounts for 20 percent of Wisconsin's economy, which obviously would include milk production. So, it is important that we support the small farmers as well as the larger operations. Everyone counts, DUH! And just so you know, Milk from Cali really does taste worse since I have lived in the West for the past year, so I would suggest supporting the Wisconsin farmer.

tjncj-California and corporate farms.
Just to clarify I have nothing against small family farmers but I also don't believe they have an inherent right to survive just because they are small family farmers and that's a tradition. Like everything producing milk is a business. If they can compete and remain in business fine. If they can't perhaps they should try something different. It's their decision.

As mainsteet posted ,some people in society do not know where some products are made, like the orange juice commercial where you stick your hand in the cooler and a person hands you the gallon of orange juice fron a tree,this might be a streach but this could be the only way some people only can realise whats going on into days world,education needs to keep up in todays enviroment. GOOD LUCK TO ALL FARMERS

Mainstreet - LOL. Thanks for the giggle.

Has anyone heard of supply and demand? When the prices were up due to high demand, farmers added cows to get more milk, thus more income. When the supply exceeds demand, prices go down. A lot of excess dairy cows are headed for Big Macs right now.

shutupandfish: That's why I wrote "many of the rest of us" and not "all of the rest of us". I don't know what the answer is for area business owners. I don't shop much, but when I do I mostly stick to the locally owned places. I find that the better service is well worth any extra cost (if there is an extra cost).

If it wasn't made as sarcasm, it sure was ignorant! My husbands family came from a long line of farmers and have now pretty much gotten out of the business because they can't make a living at it. It's so sad to see that they (in the stores) are charging almost twice what the farmers get for their extreme effort. It's a thankless,underappreciated job. Thank you to all the farmers out there who are still sticking with it. You are appreciated by the bulk of us who know what you put into it everyday.

JCK, then who will provide us milk, China?

SarahB not being a business owner you don't get unemployment.

I also took the first comment to have been made tongue in cheek. It's hard to imagine that there is anyone alive who does not realize where milk originates.
Perhaps I'm being naive, and I realize it's nearly screligious to say, but if farmers can't make a living farming maybe they should try doing something else.

Please help me understand - Why would a WI AG farm buy hay from out west? Seems the only way to make money would be grow your own or at least buy local.

I think that the first post was an expression of sarcasm and not meant to be taken seriously. Or was it?

I milked cows for many years as a kid/college student a couple of decades ago and My Dad was paid more than that a hundred weight. But in the 70's fuel was less than $1.00 a gallon, a loaf of bread was $.50 and so on. The farmer is getting screwed. Many of my classmates took over their family farms and have since got out of the business. It is a thankless job and they are hampered by the pricing system that pays you more the farther you produce from Wausau WI. Why would California producers get more per hundred? The farmer is getting $1.30 for milk I am paying $3.00 a gallon for, what a joke.

Shutupandfish: Many of the rest of us do have the government to fall back on; it's called unemployment benefits. I am confused as to just who is making the money here ... stores? ... can somebody explain it to me? Mainstreet: I hope your day improves and I mean that with all sincerity. Only an unhappy person would write a comment such as yours here.

Mainstreet- where do you think your milk in the store comes from? THE DAIRY FARMER, they are not producing all that milk for themselves. Your food products in the store all come from agriculture and farming. As producers they have to sell at the price they get, or the milk goes bad. Farmers work long hard hours everyday to put food on our table. THANK YOU to all those producers that work hard for little pay!

Imagine going to work every day for no pay and then paying your employer at the end of the week for the privilege of working next week again for no pay. That is what the market is asking dairy farmers to do.

Thank god they have the Government to subsidize them. Wish I had that to fall back on when business is bad.

Are they trying to run the dairy farmers out of business? If you pay less to the farmers, then the price of cheese and milk should be lower. Obviously the greedy like the higher prices they are getting and decided to screw the farmers. The poor farmer is stuck in the middle. Can't keep the milk because he will lose even more money. The cows keep producing no matter what.