Put a limit on how much money can be lost
April 1, 2020
In January, University of Minnesota Dairy Economist Marin Bozic’s message was that 2020 was going to be a good year for dairy farmers and milk prices.
Sadly, that is no longer the case.
“Here we are, two months later, and the world we live in is unrecognizable,” Bozic said during a Dairy Situation and Outlook webinar hosted by Minnesota Milk and I-29 Moo University. “These times are really unprecedented.”
He spoke about the current COVID-19 situation and its impact, both on people’s lives and the dairy industry.
Specific to the milk price, Bozic shared predictions for both the short and long term. With uncertainty overtaking not only 2020 but next year as well, Bozic offered some advice for dairy farmers in the area of price risk management.
Look into 2021
“In normal times, you would look at distant quarters to at least give you break-even protection before you’d pull the trigger on risk management,” he said. “I believe right now, you need to look through a loss mitigation lens all the way out to the third quarter of 2021.” (That is the most distant quarter for which prices are available.)
He explained further that in times like these, it’s not about covering your break-even price — it’s putting a limit on how much money you can lose.
“Even if you don’t have a break-even price there, I think it’s prudent to start putting in protection that far out,” Bozic advised.
Not welcomed news
This is not the news that any dairy farmer wants to hear, but Bozic said that even if we were to find a cure for COVID-19 tomorrow, there are going to be lasting ramifications on our economy for some time. “It will have a long tail and a lingering effect,” he said. “You don’t just recover from a shock like this overnight.”
While offering this advice, Bozic also reminded producers the purpose of price risk management.
“We use risk management not to protect against what you know, but to protect against what we don’t,” he said. “At times like this, we need to be humble and admit that there is more that we don’t know.”
Bozic added, “These are bad times. Think further out and have a loss mitigation mindset.”