Is Risk Management Worthwhile?
July 28, 2021
The past two weeks have not been positive for milk prices based on what has transpired in underlying cash prices. Weakness has turned price significantly lower once the spike high was set on July 14th after an emotional price increase in cash cheese ran its course. The result was that both barrel cheese and Class III futures moved to new lows. Now, it may take a monumental effort to move milk futures higher even if underlying cash increases for a few days or possibly even longer.
There has been the anticipation and still is that the heat and drought conditions that have been prevalent so far this growing year will have a significant impact on feed prices and thus on milk prices. Escalating feed prices could then have an impact on milk production as culling may increase which would reduce overall milk production and tighten milk supply. There is also the anticipation that demand for dairy products would continue to increase as restaurant traffic improves. There has also been the anticipation that strong exports of dairy products would limit inventory growth. All of these things are taking place, but so far have not had the impact on milk prices that have been anticipated. There still is a lot of time is which any, or all, of these might have an impact. However, continued strong milk production has been able to satisfy demand for both bottling and manufacturing.
The one thing we can be certain about and that is uncertainty. That is why it is important to implement a marketing program to protect milk prices against periods of lower prices. Yet, it seems difficult to many producers to utilize the tools available to accomplish that task. One of the recent tools that has been made available is Dairy Revenue Protection insurance. It is an insurance product that is similar to any other insurance that is purchased with the exception that it is purchased on a quarterly basis rather than on a yearly basis such as crop insurance.
Dairy Revenue Protection insurance has been embraced rather readily since the beginning of 2019 with quite a few farmers taking part in it. Some had received some significant indemnity payments at times depending on what day they chose to write an endorsement for some or all of their production or whether they used class or component pricing. Some received minor indemnities or none at all depending again on when those endorsements were written.
After 2 1/2 years of this insurance being available, I am hearing and sensing that some are becoming disillusioned with the program. They spent money on endorsements and have not received anything in return. They feel it is another expense that they do not need, especially during this time of high feed prices. They indicate that the insurance has not been beneficial to them. In other words, they did not receive any payment in return for what they paid for and that to them is an added expense that is not needed.
It is interesting to note that this is how some farmers look at this marketing tool. I have also heard this from those who have also used put options to protect milk prices. The fact that they did not receive any money back from that investment renders it ineffective and not worthwhile. However, those who feel this way consistently purchase crop insurance, health insurance, vehicle insurance and farm insurance without hesitation for the purpose of protection. That should be the same way with Dairy Revenue Protection insurance or purchasing puts options directly through the market. It is just as important as any other insurance. The difference is that this is protecting the income from your business while at the same time allowing the opportunity for your income to improve if the market moves higher. But as with anything else, there is an expense.
Dairy Revenue Protection insurance should not be viewed as a way to make money, but rather to protect your income from falling below the cost of production. If any marketing strategy is used to protect prices, whether for feed or milk, which will maintain or improve cash flow, then you can be confident you will remain in business as long as you desire.
Please contact me if you would like some help with marketing as I can help you with all areas of risk management.
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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