Price protection:  A tool to keep your feed costs competitive

Posted on July 5, 2023 in Dairy Performance
By Steve Good, Vita Plus dairy specialist

Price-protecting feed is one strategy to help control costs on your farm.  The current market environment and its fluctuating prices can make it difficult to budget for the cost of purchased feedstuffs, especially corn and protein.  A variety of strategies are available to producers to price-protect corn and protein sources and help control costs.  The following steps can help you choose the strategies that best fit your farming business.

1. Know your feed budget.
Step one is knowing your farm’s cost of production and what proportion of that budget is allocated to feed costs based on today’s markets.  The next step is understanding current market prices.  One source of this information is the futures quotes section of the CME Group website.  There you will find up-to-date market information along with commentary from commodity traders.  Local and regional commodity brokers can also provide information on supply and availability of what can be contracted.

2. Look at the trends.
With heightened market volatility, it’s helpful to look at historical trends to know how the markets moved during the same period of previous years.  Also look at years when the market environment was similar to current conditions.  Knowledge of this market history can help you determine the best time to buy commodities, taking into consideration the price and availability at different times of the year.  The information also can be used to help anticipate any potential risks or opportunities that may arise in the future.It is advantageous to establish trusted relationships with brokers and other professionals who have working knowledge of commodity markets and can help you make the most educated decisions for your farming business.

3. Set price targets.

Price protection is a risk management strategy that helps protect prices against potential increases in the future.  It involves locking in a set price for a certain period of time, ensuring that you don’t have to pay more for your feed ingredients if the market price increases.

Price-protecting feed ingredients can offer several benefits:
  • Budget certainty
  • Cost savings
  • Ration consistency
A solid understanding of the aforementioned items can help identify when and how to price-protect commodities.  For example, if the five-year average of your purchased soybean meal was $400 per ton and you have an opportunity to secure soybean meal at $350 per ton, it would make business sense to lock in some percentage of your farm’s soybean meal usage.  This decision also depends on whether current market conditions are similar to previous years.  If so, having a feed priced lower than your rolling average should result in a lower feed cost.
Price-protection tools can include:
  • Forward contracts
  • Futures contracts
  • Put option contracts
  • Call option contracts

Note that a positive outcome is not guaranteed.  Depending on the volatility of the market, price-protecting feed ingredients can result in a loss as compared to the cash market.  Knowing and understanding the risk is important when entering into agreements to price-protect feed.

4. Decide when to price-protect feed.
Historically, the harvest window of September/October has proven to be a good time to price-protect feed.  This time frame is dependent on the regional summer growing weather.  Now that we are in a global agriculture market, the South American harvest window in February/March could provide another time frame to price-protect feed.

5. Review your results.
When you price-protect feed, make sure you evaluate the position taken.  Calculate the average price during the price protection and subtract the position taken on the feed ingredient.  Knowing the outcome – whether positive or negative – will help you adjust your strategy in the future.

This article was originally written for the June 2023 issue of Hoard’s Dairyman.

About the author:  Steve Good is a Vita Plus dairy specialist in the thumb region of Michigan.  He is a graduate of Michigan State University and has been a Vita Plus employee owner for more than 30 years.  Good is focused on helping dairy producers make feed and nutrition decisions that support the long-term success of their herds and farming businesses.


Category: Business and economics
Dairy Performance