How far out should a farmer contract milk?
July 6, 2020
Milk prices are high now, but they are not expected to last. What might a producer do to slow the financial impact of that fluctuation?
Risk management has also changed some in response to the uncertain pandemic economy. The right tools to use now are to some degree dependent on how a farm adjusted two months ago, particularly if production was cut, described Cornell University’s Chris Wolf on the June 24 DairyLivestream.
He identified that risk management tools on the farm level fall into three general categories:
Reducing the impact of adverse outcomes: such as with Dairy Revenue Protection, hedging, and put options
Improving risk varying capability: maintaining liquidity, financial reserves, and production capacity
Maintaining decision-making flexibility: in your production strategies and in your investments
“These markets are searching right now,” Wolf said of the futures projections.
That uncertainty means it might not be a bad idea to lock in prices only a few months out, although historically, the sweet spot is nine to 15 months in the future, he said.
“This is a situation where I think being only one or two or three months out might make some sense if you have a good handle on your cost of production and these are numbers that can work for you.”
That might sound risky, but with uncertainty on both the supply and demand side, reducing the time value could be beneficial. “When you take out the valleys, sometimes you’re going to take out a peak,” he advised.
To that point, University of Wisconsin’s Mark Stephenson considered, “Putting a floor on it makes a lot of sense. But at $22, how much more upside is there?”
As for Dairy Revenue Protection (DRP), the next available contract is 2020 Quarter IV that covers October, November, and December milk. Enrollment for Dairy Margin Coverage (DMC) for 2021 begins on October 12, 2020. Those would be good risk mitigation strategies to look into.
An ongoing series of events DairyLivestream will air twice each month for the remainder of this year. The next broadcast will be on Thursday, July 9 at 11 a.m. CST. Each episode is designed for panelists to answer over 30 minutes of audience questions.