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Managing risk in today's dairy markets

Karen Johnson

“Every time the milk truck comes to pick up my milk, I send a check with the milk man,” said a local dairy farmer. As dairy farmers, we are realizing that it is becoming more difficult to make a dollar at the end of the day. Not only do farmers need to be outstanding stewards and caretakers of the land and animals but now we need to focus on how to get the most out of the valuable milk that we produce. On top of this, some dairy farmers are facing unpredictable situations when their processors suddenly decide to no longer accept their milk. Knowing the markets and your options for risk management is necessary for today’s dairy economic scenario.

Know your cost of production

Take time to look at the overall expenses for your farming operation. How much does it cost your farm to produce milk on a cost per hundredweight ($/cwt) basis? Take a close look at each item included in your farm expenses. What items are working for you? Which items are not? Before you decide to cut any corners with your expenses, make sure to think through how it may affect your farm in the long term. Include consultants such as nutritionist and veterinarians in these types of decisions to help guide wise spending without compromising milk production or herd health.

A powerful resource that we are fortunate to have access to in the Upper Midwest is the FINBIN database. FINBIN can be used to summarize farm financial and production benchmark information; you can use these summaries to evaluate how your farm compares to other dairy farms. This information may be useful to identify expenses to trim or work with to determine an alternative method of purchase to help reduce costs.

Understand the markets

Over the last couple of years, we have seen increasing variability for the milk price. The highs are getting even higher and the lows even lower. The overall economic concept of supply and demand holds true today as we watch both domestic and international need and supply of dairy products. Seasonality also plays a role on the market. In most cases, milk price is lower in the spring and higher in the fall as seen in Figure 1.

graph measuring $/cwt comparing milk prices from 2012 to 2017 with an average line

Figure 1. 5-year milk price on $/cwt by month

Consider other options

In additional to managing expenses, there are a number of opportunities to potentially increase the farm’s overall income. The past prices for milk are already set and paid. However, the futures market creates options that, if managed correctly, can reduce your farm’s milk price variability. Take time to watch and understand the future markets. By knowing your cost of production and ebb and flow of the futures market, you may be able to work with your processor or other milk marketing professional to utilize some futures or options strategies. Each farm and family is different. A proactive risk management strategy is essential to be competitive in the current dairy economy. For more information about dairy markets, please visit the University of Wisconsin’s Understanding Dairy Markets website. If the dairy economy does not improve, farms may need to look for other options such as additional insurance or alternative ways to increase income.

Dairy farming is not as simple as it once was. Farmers need to take the necessary steps to proactively manage both income and expenses. Take the time to understand your cost of production, markets and ways to effectively manage risk for the fluctuating milk prices. In the big picture of farming, there is no silver bullet to farm profitability. It is the small, incremental changes that result in a few cents here and there that ultimately have the biggest impact.

References

Gould, Brian W., and Marin Bozic. "Understanding Dairy Markets." Understanding Dairy Markets. N.p., n.d. Web. 07 Apr. 2017.

Rudstrom, Margot. "Milk marketing: Things to think about, Part I-III." University of Minnesota Extension. N.p., n.d. Web. 07 Apr. 2017.

April 2017

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