Question: I’ve already forward contracted most of my 2020 milk production, and the market keeps rallying higher. I’m missing opportunities. What do I do now?
Answer: Forward contracting milk production in the early to middle stages of a bull market cycle can be a risky endeavor. Seeing $17 and $18 milk prices on the board can look attractive at the time, but what if the market is due for another 2014-type scenario? What if the market turns higher after you made your contract sales, and doesn’t look back? Forward contracts in these early stages can get run over by the market quickly if prices are heading for $25 like they did in 2014.
The good news? You can take action now to make sure you don’t miss out on upside potential. Just be sure to move quickly to get in front of the market.
There are several re-ownership strategies that a producer can take in an effort to open the topside on any 2020 sold milk production. A few different strategy options available to you include:
- buying futures,
- buying a “bull call spread,” or
- buying call options.
Factors to weigh when deciding which strategy is right for you are to know how much money you’re willing to invest and how much risk you’re willing to take. For most producers, buying call options during market pullbacks, if used correctly, may be an effective, low-risk, and low-cost approach to re-open the topside.
Call options are a tool used to protect sold milk because they are designed to increase in value as the market goes higher. If you are currently sitting with milk sold below the current market price in 2020, consider pulling the trigger on call options valued between 15 cents and 20 cents to re-open the topside on your sold milk. Watch for pullbacks when the market prices those call options at a discount, and try to cover the same amount of milk that you have sold.
Effectively using call options in a bull market may not be enough to put your sold milk ahead of the market, but can help to limit losses drastically. Covering sold milk with this re-ownership strategy will improve your Weighted Average Price if the uptrend continues, and can help avoid being multiple dollars behind the market.
© 2020 Total Farm Marketing, a service of Stewart-Peterson Group Inc. Futures and options trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing.