Doug Block, a dairy farmer for 45 years, says he grew up in an era when the price of corn feed for cows fluctuated by just 6¢ a bushel. The U.S. didn’t ship much cheese and butter overseas, and the government often bought cheese to buoy the market when prices sagged. Those days are gone. Block’s business depends on pasture conditions in New Zealand, Europe’s inventories, and China’s milk consumption. He also has to deal with wild swings in the market after the U.S. government scaled back support over the last decade.
So in the past decade or so, Block and others in the dairy business have increasingly been doing what corn farmers have done since at least the late 1800s. They’re hedging with futures, essentially locking in a price down the road. “More and more dairy farmers will participate, because it’s a needed form of risk management,” Block says. And it’s become a booming business: Outstanding futures and options contracts for butter as well as nonfat dry milk reached a record in April, according to CME Group.
Risks and volatility continue to mount for all farmers, especially in the dairy industry, according to Dave Kurzawski, a senior broker at INTL FCStone in Chicago. U.S. farmers are producing record amounts of milk even as Americans drink less of it. Many farmers faced losses during the first quarter, and while milk futures prices have been rising recently, that doesn’t necessarily indicate profit this year given that feed and labor costs are also increasing, Kurzawski says. And prices are constantly shifting.
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