After a 12-day upward run in the spot cheese market, the technicals are showing signs of a potential pull-back. It’s possible that we’re headed for another limit down move with a negative market signal.
At TFM, we’re working with our clients to make sure they’re protected. As you think about your own marketing strategy, here are a few things to keep in mind:
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Hedge what you can, and hedge incrementally to get yourself to the percent hedged you’re aiming.
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Why not start off with hedging 25% of each month’s total production, and then seeing what transpires after that?
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If milk prices rally further, then scale into another 25%. This will help to build a higher floor over time for each month’s production, helping to increase your weighted average price.
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Avoid the trap of trying to time the top of the market.
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In a bull market, it makes sense to use limited risk positions like buying put options and Dairy Revenue Protection insurance to build a floor. Your risk in buying puts is limited to the premium paid plus commissions and fees. The biggest benefit to using these tools is that they keep the topside open. This allows for participation in a stronger move.
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By buying puts or Dairy Revenue Protection insurance, hedging production too early will have limited impact on your bottom line, because there is no ceiling on the milk.
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Ultimately, using limited risk positions in an incremental approach will allow a producer to reap benefits from a large bull market move. The best thing to do in a bull market may be to protect higher levels and to prepare for a change of trend.
If you have questions, give us a call at 800.334.9779 and ask for Mike Rusch or Matthew Strelow. They can help you think about your marketing strategy, appropriate tools to use, and how TFM can help.
®Total Farm Marketing by Stewart-Peterson Inc.
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