Half a hedge is more dangerous than none
Katelyn Allen, Associate Editor
November 12, 2020
As with every business, there are two sides to determining a dairy’s profitability — expenses and income — and both are prone to volatility. Managing one side of that volatility but not the other, though, gives you only half of a hedge and only half protection, described dairy farmer and veterinarian Bill Wavrin on the November 4 Hoard’s Dairyman DairyLivestream.
“We probably believe that a half of a hedge can be more dangerous than none at all because the price of feed and the price of milk tend to be correlated over longer periods of time, but very dangerous over short periods of time,” he said.
Wavrin, who has been dairying for 30 years, explained that his risk management team meets every Tuesday to evaluate their options. “It’s the most important thing on our agenda for the week,” he said.
To him, securing individual milk or feed price projections aren’t as important as how they relate to each other. “For us, executing effectively means margin more than it means milk price,” he said. “When we talk about taking a position, it is taking a position in margin rather than taking a position in either price or cost alone.”
Historically, farmers seem to be more comfortable with that cost side as many regularly prepay or lock in feed prices, but they may be more hesitant with the complexity of milk price management. That may be rooted in two reasons, suggested Cornell University economist Chris Wolf: tradition and taxes.
A few decades ago, milk prices were not nearly as volatile as they are now, Wolf noted, so people are not as used to securing that side of the market. On the input side, he said, “I think a lot of the feed price risk is also driven by tax management strategies. That drives how people use it.”
Securing a feed price can be a very effective tool for managing risk. But when paired with some form of price control on the income side, too, it can help ensure at least a margin to remain profitable.