OU 341 August 6, 1998

MILK PRICES: ONE BULL IN
A BEAR MARKET FOR FARMERS
H.M. Harris, Jr., Extension Ag. Economist

Farm level corn prices appear to be heading toward $2.00/bu at harvest; soybeans to $5.00; cattle and hog prices are in the pits. Meanwhile, milk prices are going through the roof!

The Basic Formula price for July was announced at $14.77/cwt, up $3.89 since May. This will generate a Class I price of $17.85 in the Carolina order for the month of September plus any effective premium. The blend price should be about $17.25 at 3.5 percent fat. Butter prices have also been climbing. Milk testing 3.7 percent will have another 40 cents or so added to the total.

What happened? Strong demand and sluggish production, the economist's standard answers to most such questions. My other explanation is that abnormal price volatility since the government ceased holding stocks under the price support program is because firms in the industry simply haven't developed effective inventory management or forward pricing strategies. Stocks start to grow; firms panic and quit buying. Stocks plummet and they panic again, fearing that they will be short of product at times of high prices.

How long will high milk prices last? Not long if history is any guide. Cheap feed this fall will help insure that history will repeat itself. Also, low beef prices will discourage culling.

Maybe its time to try the BFP futures. Below are BFP quotes at the close of August 5:

CME CSCE
(200,000 lb) (100,000 lb.)
August (Price Oct. milk) 15.26 15.27
September (Price Nov. milk) 15.17 15.17
October (Price Dec. milk) 14.25 14.25
November (Price Jan. '99 milk) 13.13 13.10
December (Price Feb. '99 milk) 13.00 12.90
January (Price Mar. '99 milk) 12.50 12.45

The problem is that trading, while growing, is still extremely light. Open interest in the CME contract was August - 456, September - 382, October - 299, with estimated trades yesterday of 24, 6, and 4 contracts, respectively. Trading on the CSCE was even lighter. Options trading is slightly heavier, with open interest in the CME August puts standing at 1,188. The August $15.00 put (right to sell milk at $15.00 BFP or higher) was trading at 13 cents.

Producers may wish to contact their co-op if interested in hedging in BFP futures or options. In the meantime, prepare for the BFP to head to $12.00 or below next spring or earlier.


THE CLEMSON UNIVERSITY COOPERATIVE EXTENSION SERVICE OFFERS ITS PROGRAMS TO PEOPLE OF ALL AGES, REGARDLESS OF RACE, COLOR, SEX, RELIGION, NATIONAL ORIGIN, OR HANDICAP AND IS AN EQUAL OPPORTUNITY EMPLOYER.
COOPERATIVE EXTENSION WORK IN AGRICULTURE AND HOME ECONOMICS--STATE OF SOUTH CAROLINA, CLEMSON UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, AND SOUTH CAROLINA COUNTIES COOPERATING.

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updated 8/24/98