Three years have passed since the COVID-19 pandemic began, but there has been a very clear lesson learned regarding the need for risk management. While the tools used from one farm to the next may be different, the data is clear — risk management has become a far more utilized practice as dairy producers have come to learn that volatility can show its face anytime.
From Dairy Margin Coverage (DMC) and Dairy Revenue Protection (DRP), which are subsidized USDA offerings, to your commonly thought of futures, options, and even now some over-the-counter (OTC) products, the greater usage of these products can be seen across the board.
Dairy Margin Coverage is the most obvious of these examples. For those unfamiliar, DMC uses the gross margin levels of dairy farms based on a formula created by USDA. This formula takes the state average milk price reported by the National Agricultural Statistics Service (NASS) and compares it against a weighted average feed cost taking into account corn, alfalfa, and soybean meal. If the gross margin ends up lower than the coverage level that a producer placed, then they will get paid the difference in margin between their coverage level and the calculated margin.
Dustin Winson
March 30, 2023
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