By Brian Gould
The volatility of U.S. milk prices increased dramatically in the mid-1990s, and it is likely to continue with the increased role of export markets as an outlet for our ever-increasing milk supply. There is also no indication that there will be any change in federal milk marketing order pricing rules. Thus, obtaining a forecast of your milk mailbox price is essential for projecting your near-term cash-flow and financing requirements, plus an assessment of your overall financial well-being.
To help dairy farmers more accurately assess their future revenue streams, University of Wisconsin Extension has made the Mailbox Price Forecaster software system. This web-based program can provide not only monthly estimates of your mailbox price over the next 12 months, but also the likely range these prices could have.
The forecasting system uses the fact that Class III and IV futures contracts are cash settle contracts — settled by cash when the contract expires, not at physical delivery. If held to maturity, these futures contracts settle to the monthly announced Class III and IV prices released by USDA no later than the fifth day of the month following production. Given this cash settlement, we can use the information in the fluid milk futures markets to estimate your farm’s monthly mailbox cash milk price.
Farmers can evaluate this software by logging in as a “guest” before setting up a permanent account. Registered users can enter and store their historical monthly mailbox prices in a secure, password-protected online data archive. Your farm data needs to be entered only once.
As a registered user, you can add new price data to your existing mailbox price database. You can even add and store monthly crude protein and milk fat content of milk if you have it, though you do not need it to obtain a 12-month forecast.
The Mailbox Price Forecaster estimates the relationship between your mailbox price and the announced Class III and IV prices, and as an option, your milk quality. A 12-month forecast (including ranges) of your mailbox price is generated using the most recent Class III and IV futures and options settlement prices that are automatically obtained by the software system.
This software includes average Wisconsin mailbox prices from January 2004 to August 2017. This data can be used to evaluate the applicability of this software to your operation. The chart below shows the results of undertaking a forecast using futures market data that existed on Nov. 17.
The user can choose the range of data to include in the forecasting exercise. Once initiated, the software does the following:
• Estimates the relationship between your mailbox price and historical Class III and IV prices observed over the selected time period.
• Accesses the Understanding Dairy Markets database system to obtain the previous day’s Class III and IV futures settlement prices for the next 12 months.
• Generates monthly estimates of your mailbox price.
• Generates a 50% confidence interval to account for uncertainty in the forecast.
• Generates a figure and a table showing the forecasts.
Gould is a University of Wisconsin Extension dairy economist through the UW-Madison Department of Agricultural and Applied Economics Renk Agribusiness Institute. This column is provided by the University of Wisconsin Extension Dairy Team.