Tuesday, March 1, 2011

Commodity Price and Inflation

(click on image to enlarge)

Both corn and oil prices were up today. The New York Federal Reserve published a study in November 2008 on commodity prices and "Personal Consumption Expenditures" (PCE) :


This article evaluates the importance of commodity price
increases for PCE inflation over the June 2006-June 2008
period. Our analysis of the role of commodities in the production
process of personal consumption goods and services
shows that crops accounted for about 1.0 percent of the cost
of inputs needed to produce a dollar of total PCE in 2006; oil
and gas accounted for 2.8 percent.

I assume the Federal Reserve might take a different view if they were feeding dairy ration and hauling manure.

Now imagine how good a tool "risk management" is if March Class III milk futures were committed in December 2010 (see graph above). Today Class III closed at $19.47 per hundredweight.


  1. John,
    Selling futures on contract lows is adding risk, not managing risk. I don't think my broker would have even let me consider such an option. But you know what.... I'm sure there were plenty of dairyman out there that let their minds get the best of em.

    Bart Handjob,

    I wish I could see it from your point of view, but I can't stick my head that far up my a**.

    Do we blame or credit the fed with MENA?


  2. Once again, Futures contracts are not offered for the benefit of those being offered to, but rather for the benefit of those doing the offering.DWCovert

  3. I know all dairymen are not brain surgeons, but I also know they are scared and if their cooperative was pushing risk management there were some who took it to heart and committed. For them the present price is a slap in the face and someone else is reapinhg the rewards. I'm also looking forward to the DIAC reccomendations soon to come out that will definately favor anyone but the farmer. Thank you John for your insightful and caring blog on behalf of farmers. Those that dissent on here are obviously not farmers, or they're on the payroll of those that oppress farmers.

  4. Skip,

    You are right. I'm a 26 yr old student of the industry. I've never owned my own cows but I hope to some day. Honest.

    I visit because I enjoy John's insight and research. He's sharp, and gets it. It's ok to disagree sometimes and spur discussion. I just wish this community could gather more momentum empowering the dairyman. The exchange is a joke. There's got to be an opportunity somewhere.

    If you'd prefer I not post, just say so. Otherwise, I'd like to help build some momentum here. Its the dairyman that need to be informed to collectively speak out.

    You have the leader. Put a plan together, and get everyone informed. Easier said than done, but seems like a logical place to start.



  5. Dave

    Go to some farms and see who the farmers are. Most small family farmers are simple hard working people who learned their trade growing up and did'nt get their accounting degree because they were living a dream their families had passed on. First to be forced into a cooperative because that's the only place for your milk to go, and then being powerless to institute change beyond what that cooperative forces you to do is disheartening. The collusion in the dairy industry is massive, and farmers don't have ONE voice that speaks for them like the cooperative/processor lobbies. Forming a coalition among all dairy farmers to be heard is a nice pipe dream, but unrealistic. In the meantime we are lucky enough to have voices like John and Pete who are tireless advocates and spokesmen for the farm. Whether you agree or disagree with what you see here does not matter as much as what you learn here. Collectively the dairyman is pretty spread out and has little time to be an activist.

  6. Accounting degree pipe dream? Come on skip.

    ~5% of dairyman are doing just fine because they are ahead of the curve. You are not, and the whining isn't going to get you there.


  7. Dave

    I am not a dairyman. I work for a cooperative that represents family run dairys and see first hand their plight. That 5% you speak of is not representative of the family run dairys in America is it? More than likely it represents the corporate dairys.

  8. So let's if I understand this correctly Skip, unless "your" cooperative pays dairy farmers significantly more than the DFA's of the world then I'm afraid that you're part of the problem!!!

    But you don't hestitate to put down a young man who seems to understand the problems in this industry and offers up what I thought were some interesting ideas!!

    It's time for folks like yourself to get out of the way. I agree with Dave and strongly believe that some form of dairy farmer ONLY coalition or cartel in this country is sorely needed.

    Only with a collective dairy farmer voice can we begin to fix the corrupt dairy pricing scheme in this country once and for all.

    Bruce - A dairy farmer in NYS with a 4 year degree accounting degree in accounting!

  9. I sold my cows in 2008 after 32 years in the business. Sold according to our plans set long before. the last 8 years we managed risk and hedged our price. 2003 was our best year of the 32. Over those eight years we averaged 88 cents over assuming all the risk; that is taking the mailbox price. It's a matter of expectations. I did not expect to get more but i happened to do better. the main thing was that I knew what I was getting. My bankers liked that and some of them did not understand the process.

  10. Nice work and good timing! Sounds like you had a plan and stuck to it. That's exactly what it takes to succeed. The risk is never higher milk prices.

    Anyone with success stories, please share.


  11. It's really sad when the coops send an employee to troll your blog to promote "risk management".