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Dairy requires three things from markets

Maggie Gilles, Kansas Dairy Farmer

November 9, 2020

Stability, predictability, and adequacy — those are three things farmers require from dairy markets. Through the last few years we can find many examples of the markets providing some or none of these traits, and that’s why Cornell’s Chris Wolf suggests risk management should be a part of every farm’s economic plan.

It’s important to acknowledge that one of these three keys can exist without the others. Wolf offered the example of 2002 and 2003, when prices were fairly stable and predictable. Those prices, however, were largely not adequate for dairy producers.

Vice versa can also be true when prices are adequate, but where the markets are incredibly volatile and hard to anticipate.

Wolf broke down current economic conditions from the perspective of each of these keys starting with stability during the November 4 Hoard’s Dairyman DairyLivestream. COVID-19, government expenditures to dairy, and international trade are all on the dairy economist’s radar to impact stability in the coming months and into 2021. “All those things are going to trickle through and matter, causing all sorts of uncertainty and affecting stability,” he explained.

A wild ride In discussing predictability, Wolf sited the wild ride dairy producers have endured because of negative producer price differentials (PPDs) this year.

“This month we are expecting an $8 spread between Class II and Class IV prices and $10 for the month after that,” he detailed. “That’s going to exacerbate that issue, and the markets are thinking maybe that comes together in 2021, and there’s some reasons to think in the longer term that it needs to, but that kind of matters. Depooling is another source that we haven’t had to deal with at these levels in the past.”

The final market trigger Wolf is keeping an eye on is adequacy.

“To me, that’s really very much about the farm level. What’s your cost of production? What’s your variable costs? What’s your cash costs? What are your total economic costs?” he posed to the audience. “Understanding your general financial position as far as your liquidity position, your solvency, and are you near danger thresholds in those dimensions that would to me indicate that you should be paying even more attention to the risk management opportunities.”

An ongoing series of events DairyLivestream will air twice each month for the remainder of this year. The next broadcast “Can we sell all this milk?” will be on Wednesday, November 18. Each episode is designed for panelists to answer over 30 minutes of audience questions.

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