Broker Predicts More Milk Price Volatility

December 30, 1999

Carl Babler, Wisconsin commodity broker, believes the milk price roller coaster of 1999 will continue into 2000. But that also allows opportunities for milk producers to lock in prices significantly higher than the price support level, he says.

Speaking earlier this month at a dairy market information meeting in Green Bay, WI, Babler says by the time the market turns down, "it's too late to buy protection. When the milk market price drops dramatically, you don't have a chance. You buy insurance when you don't need it, and you can't buy insurance after you've broken a leg."

Milk prices again are moving toward support levels, but not all producers will be affected in the same way, notes Babler. Some producers locked in prices last August for later in the year. "They are not happy that we're looking at $9 milk, but they are protected," he says.

Some producers who will receive market prices from their milk buyers would buttress the sagging price with added returns from hedging strategies designed to get $15 per hundredweight milk. He describes buying a basic formula price put in August for December for 3 cents. On a million pounds of milk, he calculates that investment of $300 will net the producer an extra $20,000.

When prices are at historic high levels, Babler says he gets nervous, since prices most likely will take a different direction within a short amount of time. Also, he says, women and men react differently to marketing strategies. "Women don't have the same kind of emotion, and they don't try to hit home runs," he says. "They are more logical and disciplined."

Brian Gould, University of Wisconsin economist, says producers likely won't see much change when a new pricing formula is implemented Jan. 1 as part of the revised federal order program. He expects the basic formula price will be replaced with the order's Class III price which largely reflects the price of wholesale cheese. For the first 11 months of 1999, he notes, the BFP averaged $12.69; if the Class III price had been in effect, it would have averaged $12.68.

"They're within a penny of each other, but that's the luck of the draw," says Gould.